America’s road to serfdom is paved with lost perspective. Inflation is tax farming and debts and deficits are the road to dictatorship. The road back from serfdom is a road that leads away from state-controlled money.

BY EL GATO MALO ON SUBSTACK

THE ROAD THERE

it’s often said that “inflation is a tax upon savers” but i think that few people really understand what that means. they see the part about “it devalues the money you have in the bank” and sort of nod and say, “yup, that’s a tax on savings alright!” but this is small potatoest acreage of that tax farm.

the bigger game is a bit more subtle.

if you really step back and look at it with fresh eyes, there is so much of “taxation” that does not make any sense.

you buy a house.

you pay property taxes on it for “services” and “safety.” this is forced. you cannot opt out. doing so means they take your house even if you own it outright. (this, of course, implies that you cannot really quite own it outright, but that’s a whole other discussion)

then you sell this house 3 years later for more (in nominal terms) than you paid for it. now let’s posit a scenario where the real value of the house has stayed about the same but the value of the dollar has been debased through inflation:

because of this debasement nominal price rose. you now owe tax on the capital gain.

it’s quite literally a tax on the government trashing the currency.

and this tax is always with us, even if housing outperforms CPI. some of that gain was debasement of currency and uncle sam and most states get paid for that too.

you even get taxed on real losses.

consider:

you buy a investment property for $1,000,000. 3 years later, it’s worth $1,200,000. but inflation over that period has been 25%. so in real (inflation adjusted) terms, your house has actually lost 4% of its value. you can trade it for less of the overall goods basket than you could have 3 years ago.

but the tax man does not care.

all he sees is “$200k gain” and you get taxed on that.

but what did you actually gain? nothing. in real terms, you lost.

you’re getting nailed with a surcharge for the poor currency stewardship of your government.

they wreck the dollar, you get the bill.

it’s a nasty fork of “hold dollars, lose value; hold assets to offset inflation, pay taxes on the gains.” now, fork 2 is generally superior but that does not make what’s happening there any sort of a priori right or ethical. the incentives are seriously perverse and note that they flow though into other taxes (like property taxes) as well as those taxes are based on the nominal, not the real value of your home and so inflation through money printing stings you again.

this flows through to every capital asset class from gold to stocks to commodities. the only one that does not do this is bonds because high rates and high inflation tank bond prices, but of course “save taxes by buying stuff that goes down” is not generally the best investment plan for long term capital preservation and interest gets taxed as normal income.

so you’re really quite stuck.

the worse job they do with the currency, the less you can afford to hold straight cash but the more they get to tax you by effectively devaluing your real tax basis on any hard assets and jacking up their nominal pricing for tax assessment.

profligacy and ponzi cause monstrous systemic federal deficits, money printer goes BRRRRR, money supply and federal debt explode, and barring special circumstance, inflation follows.

could there be a more perverse incentive set than “turn the dollar into fishwrapping and get more tax revenue?”

unfortunately, there is:

wrecking the fiscal foundations of a government historically leads to bigger, more powerful governments.

consider:

you get some serious inflation kicked up by embracing levels of government spending that would make a drunken sailor blush. this then blows out social security and medicare/medicaid/welfare costs because they are indexed to inflation and at the same time cranks up debt service costs as rates rise at the same time debt level does which widens federal deficits requiring more money to be borrowed and printed which primes us for another trip around this destructive merry go round that keeps building on itself like some sort of positive feedback hurricane convection.

and if there is one thing that never lasts long, it’s positive feedback loops. they cause explosions and take systems down. and whistling past that graveyard does not keep the zombies from eating your brains. you keep getting more and more government as the solution to all the problems caused by overmuch government power.

the worse they do, the more they take, the more power they get, the more damage they do.

lather. rinse. repeat.

we all sort of ignore how utterly mad this is because it’s such longstanding practice, but inflation is a form of tax farming and big government is a form of plowing salt into the fields. we wind up with a self-annihilating slash and burn sort of exhaustion agriculture where you keep depleting the land and leaving it worthless and the size and scope of this process starts to increase geometrically. it’s not a sustainable practice. it’s how empires die.

in the great depression, money still had metallic basis, so the federal government could not “inflate out of it” the same way. so we got depression. this time we’re going to go the money printing route because it’s better politics. but doing so is at least as bad for society.

it’s instructive to look back and see how obvious this used to be.

our framers knew it. they did not want an income tax or an IRS or leviathan. they wanted a tiny federal government.

then it got bigger, we passed the 17th amendment, and pretty soon we had the (also very new) income tax ramping up and no “states rights” to stop it. it was supposed to be a small thing, just a few taxes on the very rich. but we all know how THAT goes…

the real damage came in the 1930’s when big statism caused a great depression by trying to fix a recession with big tax and spend programs.

the US federal budget was 2% of GDP under coolidge (truly a great president). under FDR it hit ~10% even before WW2 kicked off (though a lot of the damage was done under hoover). that still sounds low by modern standards, but it’s a 5X jump and it never went back down.

WW2 acculturated people to something entirely new and vastly more intrusive. the mid 1950’s were 16% rising to 22% by 1982 when volcker finally crushed inflation.

we then got 20 years of shrinking government spending as a share of GDP and had the 80’s and 90’s, prosperous happy times in the US.

then the dotcom bust kicked off a new age of activist adventurism in central banking and trends kicked back up. numbers around 20% became normal. covid interventions drove us to 30%.

stop and think about that. the policy around covid was so stupid, so shortsighted, and so damaging that the federal response was to add an amount of spending equal to 10% of total GDP just to keep the recession “minor.” truly, the mind boggles. just that rise alone was percentage equivalent to the entire US federal budget during the great depression.

and you cannot just wreck stuff, splash cash like that, and presume it’s going to be OK.

but they always do. because “we break it means we get more power” is an irresistible siren song for dictators and autocrats.

you leave that incentive set laying around and the question is never “if?” and always “when?” and the answer is usually “right soon.”

wanna see some real prescience? this is a cartoon from the chicago tribune in april of 1934.

there are so many gems in this it’s hard to even know where to start admiring it.

tugwell drives. this was a man such a communist that he was too embarrassing for even the FDR administration so they sent him to govern poor puerto rico who has never recovered from his “reforms” that make business here a nightmare to this day.

drunk on power are “young pinkies from columbia and harvard.”

natch.

wallace et all “deplete the resources of the soundest government in the world.”

hey, wait a minute…

stalin watches happily as “the sunrise gets red.”

swap in xi and you’re still right on target.

but perhaps the best is this:

does this remind anyone of anything?

perhaps a certain reckless shuttering of the world followed by record deficits, debts, and debasement?

this is not even history rhyming; this is flat out plagiarism.

and this trick was once widely known because people had just seen it done.

but somehow we forgot.

so here comes the sequel.

“it worked in russia” is not a reference to the economy working, it’s a reference to the bolshevik revolution working and ultimately leading to dictatorial horrors like stalin taking power. it’s the marxist playbook. has been for over 100 years. it still is because it works.

• you break the economy, you run expenses out of control, and you ruin the currency.
• you make the streets and political dissent unsafe all while accusing the victims of your depredations and purges of causing the very harm you inflict upon them.
• you break culture.
• you break family.
• you turn group upon group.
• then you take the guns.
• and finally, you take the society as desperate people seek desperate solutions.

this is an old trick and is has not gotten better with age.

you do not want to go any further down this road.

this is the road to serfdom.

and denial is not a plan.

there is no world in which debt and deficit like this works out.

the road we are on does not lead anywhere you want to go.

and it’s time to make the hard choices.

they only get harder from here.

THE ROAD BACK

my essay (directly above) about the road to serfdom and the ratchets of inflation and political power providing perverse incentives laid out the problem:

so what is the solution?

the solution is to take money, commerce, savings, and investment away from not only state control but from state view. in the end, the truly operative phrase is “you cannot tax what you cannot see.”

it’s quite literally the only way to get a durable fix.

even outright rebellion and mass movements and “putting new governments in charge with better rules etc” is not a long term solution. best case, you just reset or move back on the tytler cycle. but the cycle will remain as inexorable as the seasons and you’ll be fighting the same wars over and over, probably at higher rates of speed. it’s a lot better than nothing and still a worthwhile undertaking, but i think we can do better. i think we can go our own way.

since time immemorial, governments have controlled currencies and done an awful job of it. we still call money printing “debasement” in reference to rulers mixing other metals into the gold or silver when striking coins. it’s just the classical version of “money printer go BRRRR.”

governments are lousy stewards of currency. always have been. always will be. they debase, devalue, and steal. let them run the banks as well and you are well and truly trapped. this is not some accident of financial evolution, it was done by design: rulers have always sought to control currencies because control of currencies is power and wealth.

you come into gatostan and i make you restrike your gold into “gatitos” the currency of the realm. maybe i mix some lead in when i do. or maybe i just take some of your gold as “seigniorage” and the coins you get back weigh 5% less than the ones you gave me to melt. this basically worked like early sales tax (but at least it only applied to coins once, not every time they were spent). of course “recoinages” were common so this could be repeated.

governments love banking because banks keep records and are easy to co-opt or bully. you bribe or threaten your way into getting them to:

1. let you see what everyone does
2. let you grab whatever anyone has without having to go rooting through the back yard trying to discern where they buried the silver

that second one is REALLY important so let’s delve a bit deeper.

in the age of metallic/physical money, you as an owner of such faced a choice: you could keep it yourself and hide/protect it or you could deposit it with a trusted counterparty. each has risks and costs and the danger of having (and being known or even suspected to have) large amounts of cash on hand are no joke. it attracts brigands and sneak thieves and this is, for most, unreasonable, impossible, or intolerable. very few people are willing/able to keep their life savings under the floorboards.

so you need a bank-like entity to get this money monkey off your back.

we’ve had a number of private currencies that have worked well from private US bank scrip to birmingham buttons. private issuers, especially if they must compete and clear with other private issuers and grant one another audit rights can and have provided systems for very sound money. it’s a market solution that works to create good, useful currencies.

but it’s not government proof.

no currency however sound is safe if leviathan can see it.

no bank that requires licensure from the state to operate or even whose executives and bookkeepers are known to and subject to arrest or intimidation by state actors can truly be trusted and if the IRS or DEA or FBI says “gimmie dat” the bank locks your accounts and your assets are seized faster than you can say:

civil asset forfeiture, liens, garnishments, there must be 50 ways to lose your lucre. (apologies to paul simon who did nothing to deserve that)

at least in the case of the US, this reach is increasingly near perfectly global and even the gaps are not terribly useful as you cannot get that money back into any banking system where it would be useful to you and simply being known to hold or trade assets in “forbidden zones” gets you on a list and KYC (know your customer) rules get more draconian every 5 minutes.

so you’re always, in effect, choosing between forms of thieves to which you’ll be vulnerable. the whole thing is a hobson’s choice.

and now i’m going to upset a bunch of people: sorry, but bitcoin does not fix this.

i wish it did, but it doesn’t and i’ve been tracking and digging around in it for ages and bought my first coins in 2011, so while i do not ask that anyone ultimately agree with me, i would appreciate people actually listening to my take on this first before the flood of “yOu dON’t GEt bITcoIN!” comments start. i do. and the plumbing. and the math. it’s a marvel. it’s fascinating. it was an astounding achievement and innovation. so was netscape. and like netscape, BTS is a version 1.0 product that’s not gonna make the cut.

bitcoin constitutes an exceedingly vulnerable system (often in ways people are not considering) that is highly compromised by state actors to the point of being more honeypot than hidey hole.

and you’d rather be chased by ring wraiths than these people.

BTC is certainly not a currency in any meaningful sense.

it is not a minimally viable product as either a means of exchange or as a means or escape.

and that latter one is the real doozie.

i came grudgingly to this viewpoint having been in and around BTC since it was in the single digits. i came to bitcoin through cryptography and early public key crypto projects like PGP that were so seminal in the whole idea of open source.

let me be clear: i am a huge believer in crypto-currency.

i think it’s probably the most important idea in the world right now.

but i also think it’s been stuck in an alley that ends in a brick wall as the early promise and purpose was lost among ponzi games, “coin have dog,” and lost vision and execution to the point where i was having a conversation with the founder of one of the major exchanges and he literally could not describe his order matching algo in even rudimentary terms, the primary purpose of ETH is ponzi casino games, and the best argument for BTC right now is “publicly traded ETF’s gotta buy it!”

this last one, of course, only makes the problem worse by generating not just greater fiat links but massive KYC systems. it’s all an increasingly curated garden of surveillance.

BTC was the AOL of crypto, a good start but unable to move forward out of early days; but now, BTC is predominantly spyware. and that’s not going to work out for people who want to leave governments behind.

when one looks at a currency there are a number of features that are needed:

1. sound
2. secure
3. scalable
4. widely accepted
5. stable
6. private
7. anonymous

    

BTC is 1 for 7, maybe 2 for 7, but probably not in the long run. it is sound. but it is not secure in the sense you really want it to be and the security around block integrity and ability to spam empty or altered ones inherently stands in opposition to “scalable” because its security lies in processing power and that makes scale expensive/prohibitive.

simple fact: until 100 million of us can buy lunch with it tomorrow, it’s not even in the discussion as a currency.

the argument that “this is fixable with layer 2” has been “2 years away” for a decade and yet we’re no materially closer to buying burgers mañana. this seems unlikely to change but even if it did and we got sound, secure, scalable, and widely accepted and those then led to “stable” as the tie to goods based transactions made BTC value a function of what it can buy as opposed to bubble baby beachball trading, it is STILL not a minimally viable currency. these would be neat technical feats and a cool monetary study in alt systems, but as a vehicle to “go our own way and leave leviathan behind?” nope. it’s loaded with GPS trackers, bugs, cameras, and every off and on ramp into currencies and markets is a stasi checkpoint.

private and anonymous matter and BTC is neither. tumblers do not really work and it’s easy to flag tumbled coins as they hit chains and bar them from many kinds of commerce. they can create “tainted money” lists and make merchants adhere. they are just waiting for you to set up patterns that let them lock into your public keys and get a picture of everything you have done. maybe (but quite probably not) a few utter obsessives might manage to accomplish a sort of “one time pad” for BTC, but doing this every day, every trade, every transaction is monstrously expensive and difficult. “works for the most OCD 0.001%.” is not a basis for currency and certainly not for shopping or vendors.

NSA, DEA, and who knows who else track BTC in real time and use public keys to find all your instances on the chain. they can say “yup, that’s actor 27B421R right there” and based on what you bought, triangulating on who you are and where in meatspace you reside from any even rudimentarily common consumption pattern is kindergarten trivial for tax, intelligence, or law enforcement agencies in modern america and it’s about to get 1,000 times worse as the new RISSA rules that just passed in truly shameful fashion come into effect.

in essence, any company that touches communications or has access to communications can be suborned and dragooned by NSA to help them spy on you. every cable guy, IT staff, internet company, store with wifi, or computer repair shop can, without warrant and under gag order that prevents them from revealing that this has occurred, be required to help spy on you.

this is the dark future snowden warned about.

the lack of privacy and anonymity in BTC will make it a wide open book here. if the state wants you, they get you. and it’s only going to get worse.

i spoke to a good friend of mine about this. he’s deep into these matters and comes from “the community.”

his take:

he’s the opposite of a worrywart.

this is likely sound advice.

it’s also the start of the solution.

even “my keys, my coins, no one knows my seed phrase” is not going to save you from greedy grabby government because the mere fact of being known, seen, or suspected of transacting is enough.

they come with guns and they take.

ask ross ulbricht (aka the dread pirate roberts, founder of the silk road marketplace) how “your keys, your coins” worked out for him. (they claim to have busted him based on using internet at a library. this has always seemed like an awfully rookie slip for a guy like this. one wonders about story and cover story. but i doubt we ever know.)

sam bankman fraud gets 25 years (and will not serve 10) for a massive theft, ross gets life for “trying to step outside the system.”

and yes, they did take his coins.

there is also a large “coin blacklist” to keep specific ones off exchanges, keep them from being turned to other currencies, and to track users. not hard to add “any business accepting them is complicit in money laundering” as an affirmative obligation of doing business. it locks down pretty tight pretty fast. you really want to dance in that minefield?

the whole ecosystem is now mostly spyware. you wanna know why governments don’t shut it down? because it’s a key part of their intelligence gathering. they WANT you on the open network broadcasting your moves while thinking they’re stealthy. you think you’re hiding your cards. but the cards are marked on both sides.

and so here is where we start to get down to the real nub of the matter:

like burying gold in the backyard, simply being known to have a large pile of BTC attracts thieves and many of them may have badges and the modern version of “gimmie dat” far exceeds the dreams of erstwhile sheriffs of nottingham frogmarching you to sherwood to dig up the loot.

and to avoid this, there is only one real feature that matters: invisibility.

if they decide to come and get you, then can probably have you, at least your freedom and your hard assets, home, car, etc. and cryptography is not great for invisibility. secrecy, sure. you cannot read it. but you can see it. it pops like a flare. it invites investigation. secrecy requires stealth. but how can a billion transactions a day be stealthy?

that answer is twofold: they need to mostly be “off network” and take place behind firewalls. this helps (a lot) but it still places the transactional centers as bright strobes in the data ocean and they’ll get monitored and so will all the traffic going to them and from them. that means you. and if they have your network, they have you anyway. and if they don’t have your network, this is how they will know to come and get it. and this is why we need the second half of the answer: deep, omnipresent steganography.

steganography is hiding messages against a background so that observers not looking for them do not notice that they are there. if cryptography is making the color of a grain of sand impossible to a viewer to discern, steganography is placing that grain of sand on a beach so a would be crypto-cracker has no idea which one to crack or, indeed, if there is any message here at all.

so how do we build this?

streams of encrypted data packets pop in normal networks. it’s like putting a flashing light on the users governments might be interested in. there are a hundred ways to sort them with data and network analysis, DPI, header analysis, and various forms of interception.

but only if you can see it.

if we want currency taken away from states, first we must take the internet. and this is going to be a helluva arms race. but i like our chances.

foremost, we need new structure. peer to peer mesh network structure with swarm sourced data, storage, and routing all using end to end encryption. this needs to include protocols (like IPFS) and routing, DNS, all of it. for real safety, it may well need to include layer 1 (the physical fibers and wires and wavelengths of communication) but even the creation of massive meshes of constant encrypted traffic where no outside observer can tell a cat meme from a stock transaction or a picture of your kids from the deed to your house and where senders, sendings, and pathways are all opaque gets us a lot of the way there.

this literally turns the essentially infinite resource of idiots arguing with idiots on social media into the basis to protect the privacy of the internet. (talk about an allegory for the ages)

we need a whole system that’s analysis resistant as a core design premise.

you could hide anything in that.

and THAT is how we get away.

where is the data? who knows? not even the users know. who owns it? no one you can grab. it’s not on any one server. or maybe it’s backed up in iceland or some other safe place. business models around it will proliferate. “privacy purveyor” is a great biz model for small states that are not over the barrel of US regulators holding their banks hostage (as the swiss wound up being).

maybe BTC survives as a sort of ur unit, but i think the advantages of “no one can see the chains” is going to swamp any sort of residual metcalf network value, especially if there is not a large base of actual transactions for coffee and rent and subscriptions to cat memes underpinning it.

this is a truly radical change in networks and in systems. there likely will not be a non-open source operating system you can trust and “audit and checksum for PC and phone” is going to be a big deal as the threat surface shifts to “entry and viewing.” we need new routing, new domain naming, and whole new informational topologies.

it’s a massive undertaking, but the prize is the greatest shift in power between governments and we the people in the history of the species.

a starving leviathan will have to learn to do tricks to please the people in exchange for food. we can become customers, not the captured crops of tax farmers. it’s a helluva thing to imagine.

folks are working on it and parts of it. getting it to coalesce at scale and have the heft to expand is going to be the hard trick. it’s a “minimum energy to start the reaction” sort of equation and as many stunted networks like mastadon can attest, initial energy to get critical mass is high. bittorrent has had some success.

the initial motion will be the hardest part.

if only there were a huge network, some sort of social media, owned by a guy with near infinite resources and a longstanding interest in privacy and payment systems.

if only that guy had ownership of not just to an internet network out of the reach of governments because it was in space, but had actual rockets to launch more and a US government dependency upon him for their own launches that makes him a bit untouchable.

hey, wait a minute…

turning twitter into a hybrid social media and payment system that was end to end encrypted and had a mesh topology would be a helluva beginning. start moving it to the new internet protocols. commence the vast steganographic substrate and the holy mess of traffic that defies analysis as nodes ping each other and swap data payloads just as a matter of course and no single connection can ever be said to mean anything. musk may need to do it from mars for fear of arrest, but he seems like like mars, so…

is he playing 8d chess or is this just a truly wild example of a self-assembling clowncar about to drive into a gold mine? (or might we miss this opportunity altogether?)

bottom line is that this could be the start, the critical mass that leads to a self proliferating set of open source protocols that radically decentralizes everything and takes the whole of social media and commerce out of the hands and view of government, companies, and individuals. this system is too important to be run by anyone so it must become something that is run by no one.

layer one, the actual data connections, will be the hardest part and a final “this is owned by a company” risk. i can imagine systems that do not need this, but they are difficult when countries can grab fibers. the answer may lie in open airwaves to allow peer to peer wireless mesh with satellite/fiber backhaul.

time will tell how this shakes out, but we need to start somewhere and get the ball rolling with enough mass to matter. elon, if you need a cat to come consult on this, you know where to find me.

what a future that could be.

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