This is my article! I was surprised to see it here again. I hope you all enjoy it, I had a blast writing it. Thanks again everyone for the kind words and valuable feedback.
Great article. Other comments will have plenty to nitpick, but that will always be true for an article this long that covers such a broad spectrum of the financial world (from interest rates to venture capital incentives!).
From someone who does this for a living - danielmarkbruce is right about the mechanics. When you borrow £100, you book £100 as a liability. The interest doesn't exist yet.
Interest gets recognised as it accrues over time. Each month (or whatever period), you debit interest expense and credit accrued interest payable. The liability grows as time passes.
Recording future interest upfront would violate the matching principle - you can't recognise an expense for something that hasn't happened yet. If you pay off the loan early, you don't owe that interest.
That said, I think the article's bigger point about how money flows still holds. The technical accounting is just one layer of how this stuff actually gets recorded.
He's talking about bonds, though. These can't generally be paid back early. The same goes for some other loans like mortgages which often come with an agreement that you won't pay it back within a number of years (unless you pay a fee). If you intend to pay back the interest normally then you could totally book it as a liability up front, it's the same thing at the end of the day. I mean, it is literally a liability. You've agreed to pay back the amount of the loan plus interest.
I'd encourage people doing their own accounts to think of it like this and don't do things that professional accountants do "just because".
The thing is accounting is all made up. We try to squeeze this idea of "value" into this abstraction called "money" and make it all work. But it's trivial to find cases where it's overly simplified and doesn't really work.
For example, how do you book depreciation of a motor vehicle? For the average person with a single utility vehicle the vehicle's value remains roughly the same from the moment of purchase until the moment is is written off. The value is its utility to you. In my accounts, I book this simply as "1 car" in my assets. But accountants don't like that. Everything has to be valued in money. So you end up with stupid stuff like averaging the depreciation over time that is pure fiction and only exists to make the books work and reduce the "shock" when a vehicle is finally written off.
> For example, how do you book depreciation of a motor vehicle?
For a car it is particularly easy, look up its value in one of the standard sources like blue book.
What you seem to be saying is that you don't really care to track your current net worth. Which is totally sensible if you don't care about that.
But if you wanted to track net worth, then you'd need to track the actual value of everything you own, which includes adjusting the value of depreciating (and appreciating) assets regularly.
« If you intend to hold a bond to maturity you could totally book all the future coupons and capital gains as an asset up front, it's the same thing at the end of the day. »
CPA here again, You're poking and some very interesting concepts! There is a lot to explore. Some thoughts:
- Yes money is in many ways best thought of as an abstraction. A socially agreed upon store of value that is easily exchangeable for other things of value. There is a tension (and a spectrum) between commodities that have use value and money commodities that have exchange value. In nascent market economies, commodities with use value can emerge as money commodities through consensus, that is, they emerge as socially agreed upon exchange value commodities. Think cigarettes in prison or precious metals like gold. Money commodities emerge naturally once there is enough stable volume of market activity which ensures liquidity. It's all contingent on constant market activity to keep it liquid as well as a sustained social consensus that is represents a store of exchange value. This is a lot of what Marx's Das Capital explores.
- Things like vehicle depreciation are not just so the books "work" nor is the intent for it to perfectly represent how an asset depreciates. Consider a milk delivery business. I buy a delivery vehicle year 1 for $40,000 and I expect it to last me 10 years approximately. Let's say I earn $10,000 a year for the delivery business and I pay a driver $7,000 a year to deliver milk using my delivery vehicle. If i don't include depreciation of the delivery vehicle my net income is $3,000 annually or 30%. Pretty darn good! However, we know the vehicle asset was used in service of earning all that revenue, so we should include something to ensure all revenues are netted against all known expenses whether they are wages or capital assets deployed in service of earning said revenues. Otherwise we have an incomplete picture of the business performance in our annual income statement. If I include $4,000 of annual depreciation on the vehicle suddenly I am no longer profitable to the tune of $1,000 a year. This is the matching principle. Profitability needs to ensure all revenues netted against all expenses associated with earning those revenues regardless of cash flow timing.
- But your point stands... The specific amount of depreciation annually is made up mostly, maybe the asset depreciates slower or faster. But there is enormous value in a rule consistently applied. Let's say you're an expert in delivery trucks and you know that the asset will last 20 years not 10... You could purchase the business at a cheap valuation because on paper it loses money annually, but you know the depreciation should only really be 2,000 and therefore the business is actually profitable all other things being equal. You leverage a widely recognized and understood standard applied very consistently as being imperfect, and you use that as a stepping stone to back into what you believe is the true value. This is where things like EBITDA come from that start with GAAP measures and back into what are believed to be better representations of business value, but it hinges on widely understood accounting standards being applied very consistently to create financial information that can be modified for other uses.
It matters because it screams "I don't actually know what I'm talking about". And it's not just a bookkeeping error. It's a conceptual error. It's a complete misunderstanding of the time value of money.
As such, it's a self indulgent piece of writing, not a helpful one.
It was quite a good article if you don't care to nitpick over terminology. Too many technical people avoid the business side of things because they find it boring or are too cynical to engage with it, which limits their impact. Instead we get sleazebag money guys running the world.
The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.
>> Instead we get sleazebag money guys running the world.
Nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).
Yes, at the time of the initial transaction the borrower would not have a liability on their balance sheet that included the interest due.
Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.
It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.
Most of the really stupid stuff written is written in good faith. It's not an excuse. There are many good books written about the financial system, accounting, etc. Rather than writing just another (incorrect) blog post, why not point to the good sources of information?
You are fixating on one tiny point which isn't really that important within OP's ... errm "opus".
Why not critique the entire work?
Anyway:
I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.
However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).
When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.
However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.
All those interests will also end up in additional accounts related to probably banking.
I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.
What gets on my tits is assertions such as "People who don't understand ..." with no working.
Yeah CPA here. On the day you take out the loan you're not in debt 110, you are in debt 100; you would accrue interest expense over the term of the loan. What if the lender called the loan day 2 for some reason? You wouldn't pay 110, probably just 100 plus one day of interest. Goes back to fundamental definitions of financial statement elements. Liabilities are present obligations.
Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.
Also you would not be "in debit"; the liability is on the credit side of your balance sheet.
What gets on my tits more is people who are pretty bright in one field (hacking) thinking that entitles them to just brute force their way through reasoning about some other field (finance) that in their arrogance they think is simpler.
You can't have taken a class on finance and/or accounting and passed it. This is 101 material, literally. Read the CPAs take.
And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.
the US treasury secretary was on calls about whether to bail hedge funds out of gamestop to prevent cascading financial system failures. arguably there is nothing that is too dumb to be written about finance. dont let anyone discourage you.
Various government agencies are on calls to bail out various players in the financial system all the time and will continue to be. That isn't dumb per se.
Balance sheets and accounting are made up. You know in maths how you could do calculations on two different ways and arrive at the same result? That's what the author is doing. "Proper accounting" is how you do it, but you could actually just think of it this way. It makes no difference to the end result.
Epicycles in a geocentric model of the solar system is another way of looking at planetary motion. It breaks down due to the required addition of complexity to explain discrepancies between the model and truth, which is the same for this particular situation. In addition to what the CPA said, how does this model work with callable, putable, or floating rate bonds where the interest payment is not known up front?
In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.
> In practice, buybacks can be used to create what is effectively a
shareholder dividend in a more tax-advantaged way. Whereas with dividends,
they are taxed as income, and this is realized immediately. With buybacks,
they are taxed as capital gains, but crucially the gains are not realized
until the asset is sold. This could be indefinitely far in the future, so
it's more capital efficient. It has the added benefit that it helps pump
the token, and imo this is kind of cute because it marries both the
fundamental and speculative aspects.
This depends a lot on jurisdiction.
Some jurisdictions give you a certain amount of dividend income tax free. Some jurisdictions tax your capital gains even when they aren't realised. Lots of other variants exist.
I don't know if this counts, but I believe Norway taxes unrealized gains (indirectly) via wealth tax. All stock value is on the chopping block come tax time.
I doubt this is a common thing. Whereas the other case (dividends tax credit) is far more common. It impacts those of us in Canada. Our government disincentivizes buybacks and encourages dividends instead. Typically, if you're in a low income bracket, and have investments brewing for decades (with high amounts of unrealized gain) in an unregistered account, it is preferable to get dividends over buybacks.
Denmark is one of them. Germany has something similar. But you can ask your friendly neighbourhood LLM for details on the world's jurisdictions to get a complete list.
> A common lament among founders, even successful ones, is:
"Sometimes I feel like I'm wasting my twenties".
Interesting perspective, I feel like I see this much more attributed to someone working on a meaningless problem for a paycheck at a large company. I guess it speaks to the difficulty in finding purpose in any endeavor in your twenties.
It's basically a tradeoff between wasting your personal life or wasting your professional life. If you get a job that is truly 9-5 (or maybe even a bit less), it leaves a lot of time for forging friendships and relationships and learning hobbies while you're still young, doing sports, seeing the world.
Founders usually feel they're missing out on all or most of these. And some of them probably feel like they don't really have a choice - maybe their specialty/resume is one that's difficult to get hired but skilled enough to make money on their own.
However, plenty of jobs take all your time and still feel meaningless. Many (most? - median personal income in USA is $42,000) don't pay enough for people to really socialize much anyways or do most of the hobbies they might enjoy or travel at all. Generally, having the choice of "HOW should I 'waste' my twenties?" is a fairly privileged one.
Well said. To expand on what you wrote, I like to think of there being three components (axes) to activities: fun, value, and meaning.
Fun is you enjoy doing it. Playing video games and watching TV is fun.
Valuable is it makes money. Importantly, it's what other people are willing to pay you money for, not what you think is important or even good.
Meaningful is it's spiritually enriching. These are things you would regret not doing on your deathbed. Spending time with your family or going to church are common examples of things that are meaningful to people (and potentially fun). This one is defined based on one's internal compass and varies significantly from person to person.
You can come up with activities that are pure fun, value, or meaning. Measuring activities against these three axes has been a valuable mental model for my time management and life design.
There's jobs that are fun and meaningful, but don't pay much. This is like charity work or passion tax industries such as game dev, music, or art.
There's also jobs that are fun and valuable, but are meaningless. Working at a trading firm/hedge fund is a common example (though some people may find that it's all three or only one). Another example is being a successful startup founder working on the wrong problem.
Finally, there are jobs that are valuable and meaningful, but maybe not all that fun. To me, this is what being a startup founder (working on the right problems) or how I imagine a professional athlete is like.
The grand slam would be having all three, but in my experience these are exceptionally rare. If it's fun and meaningful, everyone wants to do it, and supply and demand pushes the value down. Most of these cases are due to unusual personalities that let one find fun or meaning in activities others don't. This ties into the common startup advice of paying attention to "founder-problem fit" and "what are your unfair advantages".
I have this crazy insatiable addiction to food and shelter. My paycheck supports my addiction.
Thought experiment: you have three sets of 10 recent college grads. One set works as enterprise devs in a tier 2 city, one set works at BigTech and another set works for a startup, which group do you think will have the highest median income after 10 years?
I would much rather work for a “meaningless paycheck” (and RSUs in a public company), than bust my ass at a startup for below market wages and “equity” that is illiquid and will statistically be worthless.
> "Sometimes I feel like I'm wasting my twenties".
Is near universal to anyone in their twenties regardless of job type/sector. It's the start of most people's adult life, and without the lack of experience that age brings, it's natural to question if you're on the "right path" and/or be swayed by potential other opportunities you've not yet explored.
Hell, even with the experience of age, people still often ask themselves that very same question, and not just for their twenties either.
Exactly, I know people who weren't founders, had a typical college experience and then got a "normal" job that look back and feel as though they wasted their twenties because they didn't grind out some start up. Looking back and wondering if you could've/should've done more/differently is a super common experience.
But wagies clock out at 5 and live that half of their lives, severance style.
Startups/entrepeneurs often don't even have that duality and live our single life entirely through work. I would identify with "wasting my twenties" in the sense that the life of the entrepeneur isn't really age specific, it would be quite similar to do business at 20 than to do it at 50. The only difference being experience. But there's not much use of my young body, or libido, strength, that is typical of youth experiences.
This is a critique of the VC ecosystem based on a dichotomy of "inflated" versus "fundamental" value, with a CTA to hackers to "do something about it."
Here's one that better suits the title:
"Pricing Money: A beginner's guide to money, bonds, futures and swaps" (866 points)
This smells a lot like a hacker thought because they are exceptional in one field (cybersecurity), they therefore are exceptional in all fields. The result is that information presented in this article is very surface-level, and quite biased.
Graeber is controversial. Archeologists hate how he argues by ad hominem and does not appear to understand the works he cites, to make his argument.
I can't speak to his work on finance as a whole. Regarding deep time, his claims about pre-literate society from archeology are not widely supported, they use thin evidence to argue badly.
His anarcho-socialism isn't the concern. It's his lack of historicity, and inability to bring his peers with him on radical ideas which concerns me.
He's dead, he can't defend himself. So there's that.
Is your comment perhaps in reference to the comment ‘ the assumptions and estimates that go into it, I recommend Financial Intelligence by Joe Knight and Karen Berman’ and not the parent comment you’ve replied to?
the only thing it takes to be exceptional in most fields is time and effort. there is no secret sauce. There is not something innate that "finance people" have that "computer people" don't, other than a willingness to trudge through boring finance-related crap and vice-versa.
This is all spawned from insecurity that your prestigious degree or whatever can be replicated through independent learning
Being exceptional in cybersecurity is a pretty good indicator that someone will be successful in other fields. A good cybersecurity person will understand that cybersecurity is a mix of technical mastery and the art of understanding human behaviour.
> Being exceptional in cybersecurity is a pretty good indicator that someone will be successful in other fields.
I am not so certain about this. In particular being exceptional in cybersecurity does not make you good at playing political games or having the traits that a lot of bosses want from employees (I will attempt to avoid starting a discussion whether I consider such traits to be good or bad).
The critique of the financial system relies on a misunderstanding of the Discounted Cash Flow (DCF) model.
You conflate 'r' (the discount rate) with 'Rf' (the risk-free interest rate). In reality, for high-risk assets like startups, 'r' is defined by the Weighted Average Cost of Capital (WACC) or CAPM: r = Rf + Beta(Rm - Rf).
Even in a ZIRP environment where Rf -> 0, the Beta (risk/volatility) for a startup is massive. A rational investor would still demand a high 'r', leading to a low valuation. The fact that VCs ignored this and funded "blatantly bad deals" cannot be explained by low interest rates alone. It is better explained by the information asymmetry a.k.a principal-agent problem.
We have a system where capital flows from passive LPs through multiple layers of rent-seeking intermediaries (VCs, LPs, Fund Managers) who are incentivized by management fees rather than carry. The market failure described isn't "financial nihilism" and "financial short-termism". It's a breakdown of feedback loops where intermediaries face no downside risk for misallocation. When there is no market coordination, no real competition, just unrestricted collusion, then things start to not make sense from the old school financial/business perspective. I do not think this is the failure of economic theory or the financial models itself, rather just that nobody knows or tells, that the prerequisite for these things is at least some degree of fair competition, market based economy, informed, rational actors and restricted collusion.
Suggesting that technical founders can fix this by simply "being decent" ignores the systemic reality. This economic structure rewards extraction over value creation, "decency" is an evolutionary disadvantage. The "real hackers" in this story are the financial and business intermediaries who successfully reverse-engineered the economy to extract rent without generating value, similarly to all those entrepreneurs, CEOs, corpo drones in the business sphere who do not provide any meaningful value to society (and shareholders as well.)
I can relate to a lot of things said in the article, both practically and philosophical. Thanks for speaking to/for fellow hackers!
PS: Hackers websites don't have to look this ugly. We do take care of attention to detail that the page have to be rendered for mobile devices as well.
That's primarily not a website, but a hacker zine. That's just the format they come in for historical reasons, similar to RFCs.
I personally also don't love it, but fortunately, hackers have the technology to reflow legacy fixed-width text files to any format of their choosing :)
For anyone looking for basic information of financial statements in business, the assumptions and estimates that go into it, I recommend Financial Intelligence by Joe Knight and Karen Berman. It helped me understand how much fuzziness happens in financial statements and how they can affect a business operation
This probably won't make you feel any better, but banks don't really loan out money that's not theirs. When they lend money, they literally create it out of thin air. Creating that money has a cost, which is what ultimately limits how much they can lend, and having more deposits can lower that cost somewhat, but there's no direct connection between the money you deposit in your account and the money that the bank lends to someone else.
The modern world would collapse in about a week if banks were not allowed to loan out deposits.
The ability to satisfy needs now and pay for them in the future is why you can have a house, why governments can build infrastructure, etc. That’s the only reason that banks really exist. Keeping your deposit safe for you while providing convenient access via cards, checks and other rails is just a wonderful side effect.
After a few thousand years of civilization we don’t have anything better that could allow you to satisfy current needs with future income. Direct loans are just vendors acting as de facto banks, at much higher risk.
A bank product that doesn’t loan out your deposits is called a safe deposit box. There’s your solution.
> The ability to satisfy needs now and pay for them in the future is why you can have a house
The housing market has been greatly influenced by the ability to loan vast sums for housing, and without that we would have a very different housing market but we would still have one.
I think banks should lend but it's probably fair that we have controls on lending, and I think we should probably tighten them up especially around housing.
The problem isn't really that banks can create money. Ultimately it's up to the people whether they trust paper IOUs or not. The trust in IOUs happened organically and would happen again, unless you suggest they should be outlawed (ie. it's illegal to write a piece of paper saying "I promise to pay the bearer..." on it).
The problem is the governments can bail the banks out. After 2008, trust in paper IOUs (or their digital equivalent) should have plummeted, leading people to seek to store their wealth in other ways. But it didn't, because the governments stepped in and said, "nah, we need this to work, so we'll pay their salaries and bonuses with your taxes".
Bitcoin was intended to be a solution to this problem. There's nothing stopped people creating derivatives on top of Bitcoin and trading those. But nobody, no government nor anybody else, can just print more Bitcoin.
most of the financial systems are just as hackable as computer systems, but most "security" startups just build compliance checkboxes and culturally appropriate hacker ethos for VC money.
> but reading indictments to learn from others' mistakes.
Oh oh.
> It's about knowing where to buy estradiol valerate on the internet and how
to compound injections
Oh no.
This is 5 paragraphs in, and I already red-flagged out of this, not just because of the time it would take to read this, but because I don't want to go crazy reading this stuff.
In case it isn't clear, it's not healthy to read indictments thinking how to avoid being caught by law enforcement and buying grey market hormones. Politics aside, at least get a prescription, it's not like they are not giving them out.
Hacking is a huge spectrum I know, but if we have to decide on some limits to what is open to be modified and understood by the lay(wo)man, and what is closed and left to professionals, wouldn't we agree that law and medicine would be such fields? (and possibly military?) Trying to hack medicine or law is as extremist as arguing that you don't have the rights to plant the seeds of fruit you buy.
As far as rights go, sure people are given the rights to represent themselves pro-se and apparently to buy hormones online, but going beyond what's allowed, are you really willing to ruin your life just to stick it to the man or to exercise your right to do whatever?
How money works? Well look into fractional reserve banking and do the math. If you’re a bank, you can just loan out 10-100 times what you have in assets and ask say 5% interest. Then 5*10 to 5*100 is your annual interest to the bank. That’s why the Bible and Quran are against usury.
That’s not how banking works. Banks cannot lend “10–100× their assets.” Loans are assets. Deposits are liabilities. What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.
The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%.
Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit).
This is a popular myth, not “doing the math”.
What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
> What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.
I'm with you in principle. But alas there's lots of regulation that muddies the economic waters. Eg reserves do limit lending in some places at some points in time.
> What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
Yes, indeed. People usually get a loan to spend the money (ie invest it). Otherwise, why bother with the expensive loan?
It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.
I recently discovered narrow banking (https://www.narrowbanking.org/) which basically states the idea of narrow banking which can only make it so that the bank doesn't have the issues with fractional reserve banking if you are worried about it
Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking.
Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
Narrow banking was denied a depositor account at the fed IIRC so it's basically DOA as they've envisioned it.
IIRC the fed said that narrow banking threatens the stability of the banking system since private credit expansion (and ultimately, the risks that come with that) is in their estimation desirable. Regulators want nothing but to crush the idea.
You are mixing up a lot of different ideas and concepts.
Historically, the combination of fractional reserve banking and the classic gold standard was very successful. Just because your bank uses grams of gold as the unit of accounting (or something that's effectively equivalent to grams of gold), doesn't mean they need to have that much of gold in their vaults. Similar to how today a bank will give you dollar bills when you ask for them, but that doesn't mean they need to have their vaults stuffed full of dollar bills. They just need enough solid assets to sell for dollars, so they can give you dollars when you want to withdraw. (Having some gold or dollars on hand is just a convenience, so you don't have to wait for the bank to liquidate assets.)
About narrow banking: there's at least two different definitions of the idea. What your website describes might be called 100% reserve banking. The website is a bit silly: you can already get 100% reserve banking today, if you want it.
The website is also extremely misleading and dishonest about fractional reserve banking. You can eg just follow their own link to the Bank of Amsterdam and read up on it.
> Narrow banking is a proposed banking system that would restrict commercial banks to hold only safe and liquid assets, like government bonds, against customer deposits, while prohibiting traditional lending activities. Under this model, banks would function as custodians and payment processors, separate from the lending function performed by other financial intermediaries.
This is like a normal fractional reserve bank, but the only asset they invest in is government bonds. This can still go wrong, if you are not careful: Silicon Valley Bank invested mainly in government bonds, but had a maturity mismatch. Their long term government bonds lost in value (because market interest rates went up), so they went bankrupt. Alas, they still got bailed out.
You can approximate this kind of narrow bank for yourself, by just putting your money either in government bonds directly, or into a money market fund that only invests in government bonds.
> [...] I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.
> There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
Wise offers to keep your money in a fund and they transparently sell your fund shares, when you are buying a coffee with your card. They transparently buy fund shares, when money comes into your account.
Addendum narrow banking in the sense of only holding government bonds:
I think that should be legal for banks to do, and in fact it's a good argument in favour of eliminating deposit insurance. At least the (explicitly or implicitly) government backed deposit insurance that you have eg in the US. It creates a moral hazard where the incentives for monitoring risks are all but dulled.
People who still want the equivalent of deposit insurance should just put their money into a bank that only invests in short term government bonds: after all, a government backed deposit insurance can't really be safer than these short term government bonds anyway.
> That’s why the Bible and Quran are against usury.
That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
> It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.)
Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.
> The regulatory capital ratio determines how much capital they must hold to support the assets.
That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions.
The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios.
Interestingly they barely held any reserves at all, perhaps 2% or less of assets.
These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.
This is a common misconception, thinking that fractional reserve banking is the way in which banks lend. In actuality it's a limitation to how banks lend.
Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
> Without fractional reserve rules the banks could lend their money infinitely.
What's that supposed to mean?
> I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements).
The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.
That's in the US. Canada for example never had any legal reserve requirements.
However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around.
The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves.
If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.
I legitimately thought the description of a 'shitcoin' was supposed to be a euphemism for IPO shares until it turned out there was a separate section for that.
real learning- copy paste the content and ask for “critical and constructive feedback and potential false narratives from industry professionals” to get 10x from it
From the first sentences, it looks like a 0.1x value. Discrediting the expanded hacker concept just because, criticizing its non-pc language, shaming on the small imoralities (in an industry full of life ruining unethical practices). The list goes on, and I didn't read everything!
In practice, that prompt gets chatgpt role-playing as industry professionals: who knows if it's near or far from the real deal.
Also, reading long texts is good for comprehension. You don't learn with reading summaries, you learn with repetition and even further if write your own summaries.
This article discusses high quality investors. Where do I meet high quality founders? I’d be willing to bet my time on a good one, but all I come across is the shitcoin equivalent.
> Markets are computers; they compute prices, valuations, and the allocation
of resources in our society. Hackers are good at computers. Let's learn
more about it.
I think overall, the idea of money is messed up on many levels. What we call 'money' today doesn't even have an identity. It's the most important thing in the world, it's also the most heavily utilized thing in the world but almost nobody knows what it means.
- It's backed by nothing.
- It's not a fair medium of exchange because it physically cannot circulate very far from 'money printers' (not many hops) before it's taxed down to nothing. This means that it's unevenly scarce based on social proximity; unfair by design. Cantillon effects on steroids.
- It doesn't even exist as a single cohesive concept; the US dollar in your bank account is not the same as the US dollar in your friend's bank account and it's not the same as the US dollar which European traders use to buy derivatives (e.g. Eurodollars)... There are literally thousands of different ledgers (banks, institutions, in different countries), each presenting its own interface supposedly showing their holdings of this mythical unit called 'The US dollar' which is actually thousands of different currencies, which happen to share the same name, scattered around the world and held together only by regulators whose only shared interest is to print more units for themselves than the next guy does. Slow and fallible human regulators represent the only layer of 'consensus' which exists for the entire fiat monetary system; they move at snails' pace in a world of high frequency trading.
Money is never backed by nothing, or it's worthless. It may not be backed by anything physical, but it's always backed by some form of trust. National currencies are backed by trust in the corresponding government and institutions.
But that trust is often backed by nothing. Especially if you don't own assets; then from that perspective money is really working against you and is backed by pure coercion... But coercion is not an asset and it doesn't have net positive value; at least not to the victim.
It has value from the perspective of the oppressor I guess... I think this is where it derives its value.
I was disappointed this wasn't about how money itself works - instead it's about various financial arrangements you can use to scam people.
There's a lot of stuff to talk about with how money works! Like, when I use my Visa card issued by a New Zealand branch of an Australian bank to buy something in Europe, there are zillions of moving parts there.
The fact that money doesn't actually move internationally but yet appears to, and the fact that currency exchange can be done despite that. And that 60% of everything is backed by US dollars (rapidly dropping now). How bank transfers work with and without a common central bank; the different mechanisms countries set up to streamline them.
And, the fact that it's not really centrally controlled, and anyone (like Satoshi Nakamoto) can make a currency and there's not really anything a government can do to prevent currencies it doesn't like, and despite that we do mostly have one government-issued currency per country.
I'm an ant. I want to tell you how the chemical trails work. Here is how the pheromones work....
Except. The main point of chemical trails, money or other implementations of the messaging bus of a complex adaptive system is THE COMMUNITY it creates. Think the Sapir-Whorf hypothesis, but instead of language determines what you think, expand that to "your messaging bus language determines how your community functions". Yeah there is lots of stuff about money, but how it determines the form and function of the community (as in CAS) is the important part.
The other primary thing to think about money - once you get that it is a messaging bus - is the idea of making money from money. When you understand the function of the system you can then understand that making money from money is not a good idea. This is not a new idea. The concept of throwing the money lenders out of the temple has been around for a long time.
If you understand money, then you will be able to answer this question:
why is making money from money a bad (dysfunctional) idea?
This is my article! I was surprised to see it here again. I hope you all enjoy it, I had a blast writing it. Thanks again everyone for the kind words and valuable feedback.
Great article. Other comments will have plenty to nitpick, but that will always be true for an article this long that covers such a broad spectrum of the financial world (from interest rates to venture capital incentives!).
Kudos for taking the time to put it all together.
From someone who does this for a living - danielmarkbruce is right about the mechanics. When you borrow £100, you book £100 as a liability. The interest doesn't exist yet.
Interest gets recognised as it accrues over time. Each month (or whatever period), you debit interest expense and credit accrued interest payable. The liability grows as time passes.
Recording future interest upfront would violate the matching principle - you can't recognise an expense for something that hasn't happened yet. If you pay off the loan early, you don't owe that interest.
That said, I think the article's bigger point about how money flows still holds. The technical accounting is just one layer of how this stuff actually gets recorded.
He's talking about bonds, though. These can't generally be paid back early. The same goes for some other loans like mortgages which often come with an agreement that you won't pay it back within a number of years (unless you pay a fee). If you intend to pay back the interest normally then you could totally book it as a liability up front, it's the same thing at the end of the day. I mean, it is literally a liability. You've agreed to pay back the amount of the loan plus interest.
I'd encourage people doing their own accounts to think of it like this and don't do things that professional accountants do "just because".
The thing is accounting is all made up. We try to squeeze this idea of "value" into this abstraction called "money" and make it all work. But it's trivial to find cases where it's overly simplified and doesn't really work.
For example, how do you book depreciation of a motor vehicle? For the average person with a single utility vehicle the vehicle's value remains roughly the same from the moment of purchase until the moment is is written off. The value is its utility to you. In my accounts, I book this simply as "1 car" in my assets. But accountants don't like that. Everything has to be valued in money. So you end up with stupid stuff like averaging the depreciation over time that is pure fiction and only exists to make the books work and reduce the "shock" when a vehicle is finally written off.
> mortgages which often come with an agreement that you won't pay it back within a number of years
Not "often". Prepayment penalty mortgages can exist but I've never seen or talked to anyone who has seen one in practice.
Some web searching suggests that only about 2% of home mortgages have prepayment penalty clauses.
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> For example, how do you book depreciation of a motor vehicle?
For a car it is particularly easy, look up its value in one of the standard sources like blue book.
What you seem to be saying is that you don't really care to track your current net worth. Which is totally sensible if you don't care about that.
But if you wanted to track net worth, then you'd need to track the actual value of everything you own, which includes adjusting the value of depreciating (and appreciating) assets regularly.
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True or false?
« If you intend to hold a bond to maturity you could totally book all the future coupons and capital gains as an asset up front, it's the same thing at the end of the day. »
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CPA here again, You're poking and some very interesting concepts! There is a lot to explore. Some thoughts:
- Yes money is in many ways best thought of as an abstraction. A socially agreed upon store of value that is easily exchangeable for other things of value. There is a tension (and a spectrum) between commodities that have use value and money commodities that have exchange value. In nascent market economies, commodities with use value can emerge as money commodities through consensus, that is, they emerge as socially agreed upon exchange value commodities. Think cigarettes in prison or precious metals like gold. Money commodities emerge naturally once there is enough stable volume of market activity which ensures liquidity. It's all contingent on constant market activity to keep it liquid as well as a sustained social consensus that is represents a store of exchange value. This is a lot of what Marx's Das Capital explores.
- Things like vehicle depreciation are not just so the books "work" nor is the intent for it to perfectly represent how an asset depreciates. Consider a milk delivery business. I buy a delivery vehicle year 1 for $40,000 and I expect it to last me 10 years approximately. Let's say I earn $10,000 a year for the delivery business and I pay a driver $7,000 a year to deliver milk using my delivery vehicle. If i don't include depreciation of the delivery vehicle my net income is $3,000 annually or 30%. Pretty darn good! However, we know the vehicle asset was used in service of earning all that revenue, so we should include something to ensure all revenues are netted against all known expenses whether they are wages or capital assets deployed in service of earning said revenues. Otherwise we have an incomplete picture of the business performance in our annual income statement. If I include $4,000 of annual depreciation on the vehicle suddenly I am no longer profitable to the tune of $1,000 a year. This is the matching principle. Profitability needs to ensure all revenues netted against all expenses associated with earning those revenues regardless of cash flow timing.
- But your point stands... The specific amount of depreciation annually is made up mostly, maybe the asset depreciates slower or faster. But there is enormous value in a rule consistently applied. Let's say you're an expert in delivery trucks and you know that the asset will last 20 years not 10... You could purchase the business at a cheap valuation because on paper it loses money annually, but you know the depreciation should only really be 2,000 and therefore the business is actually profitable all other things being equal. You leverage a widely recognized and understood standard applied very consistently as being imperfect, and you use that as a stepping stone to back into what you believe is the true value. This is where things like EBITDA come from that start with GAAP measures and back into what are believed to be better representations of business value, but it hinges on widely understood accounting standards being applied very consistently to create financial information that can be modified for other uses.
This is bad, don't read it. When you borrow $100 you do not create a liability which includes the interest to be paid.
People who don't understand the very basics of finance and accounting shouldn't write about finance and accounting.
The $100 does become a liability on your balance sheet. You’re right that interest doesnt and is an expense.
In the context of this post, does it matter? He’s not teaching bookkeeping here. He’s explaining the time value of money.
He's explaining the time value of money but uses an example that accrues interest before any time has passed?
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It matters because it screams "I don't actually know what I'm talking about". And it's not just a bookkeeping error. It's a conceptual error. It's a complete misunderstanding of the time value of money.
As such, it's a self indulgent piece of writing, not a helpful one.
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She
It was quite a good article if you don't care to nitpick over terminology. Too many technical people avoid the business side of things because they find it boring or are too cynical to engage with it, which limits their impact. Instead we get sleazebag money guys running the world.
The people who are in a position to influence the world are those who understand it, and if this article nudges people with a hacker mindset towards having more influence, then that's a good thing.
>> Instead we get sleazebag money guys running the world.
Nonsense. To the extent some small group of people have an outsized influence it's politicians and the rich of the rich (who at this point are overwhelmingly tech guys).
> The people who are in a position to influence the world are those who understand it
are those who can pay people who understand it*
Yes, at the time of the initial transaction the borrower would not have a liability on their balance sheet that included the interest due.
Over the course of the borrowing period the borrower would accrue interest expense commensurate with the passage of time that would increase the borrowers total liabilities. The author misunderstands the fundamental accounting definitions of liabilities (and also assets). Liabilities (under US GAAP but same core idea under IFRS) are present obligations. At the initial time of borrowing the borrower does not have a present obligation to pay interest on the liability. Similarly, an asset is a present right, and at the time of initial borrowing the lender is not owed the interest.
It's not the worst thing I've read, the author has clearly spent time learning things in good faith. That said, there are lots of indicators the author is not an expert in accounting / finance.
Most of the really stupid stuff written is written in good faith. It's not an excuse. There are many good books written about the financial system, accounting, etc. Rather than writing just another (incorrect) blog post, why not point to the good sources of information?
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You are fixating on one tiny point which isn't really that important within OP's ... errm "opus".
Why not critique the entire work?
Anyway:
I borrow 100 from someone. I am now in debt and they are in credit - to balance, both are 100.
However, they require a return on investment - usury: 10 for 100 (or a 10% margin - call it what you like).
When I take out my loan, I am in debt for 110 and they are in credit for 100 with a promise of 10 later. So we have some accounts - my one account is 110 in debit (I borrowed 100 and promised to pay 10 on top) and they have two accounts - one for the principal (100) and another for the 10 interest. To me, in this case, the principal and interest are part of the same account but to the lender they are separated out because the interest is probably taxable as income.
However, it might be the case that I can set off my debt or the interest on my debt against some tax. In that case I will maintain two accounts - the principal and the interest.
All those interests will also end up in additional accounts related to probably banking.
I've probably pissed off a few accountants with my choice of terms but in the end I do understand how fiat money works.
What gets on my tits is assertions such as "People who don't understand ..." with no working.
Yeah CPA here. On the day you take out the loan you're not in debt 110, you are in debt 100; you would accrue interest expense over the term of the loan. What if the lender called the loan day 2 for some reason? You wouldn't pay 110, probably just 100 plus one day of interest. Goes back to fundamental definitions of financial statement elements. Liabilities are present obligations.
Anyways, recognizing the interest over time would debit an expense account and credit some liability account... Could be the same account as the loan or could be an interest payable account, doesn't really matter in the context of the example.
Also you would not be "in debit"; the liability is on the credit side of your balance sheet.
What gets on my tits more is people who are pretty bright in one field (hacking) thinking that entitles them to just brute force their way through reasoning about some other field (finance) that in their arrogance they think is simpler.
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You can't have taken a class on finance and/or accounting and passed it. This is 101 material, literally. Read the CPAs take.
And, in my initial comment i explicitly point out the error - the interest amount should not be there. People don't tend to show the working for zero * x = zero. This misunderstanding of a very fundamental piece makes any material on this topic by this author not worth reading. It might render everything they write not worth reading because they also don't know where their circle of competence stops.
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If you take that logic to its natural conclusion HN would shut down.
Why not? One of these days YC is gonna fund something worse than Flock and get itself on the Senate's radar.
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touche
the US treasury secretary was on calls about whether to bail hedge funds out of gamestop to prevent cascading financial system failures. arguably there is nothing that is too dumb to be written about finance. dont let anyone discourage you.
Various government agencies are on calls to bail out various players in the financial system all the time and will continue to be. That isn't dumb per se.
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Balance sheets and accounting are made up. You know in maths how you could do calculations on two different ways and arrive at the same result? That's what the author is doing. "Proper accounting" is how you do it, but you could actually just think of it this way. It makes no difference to the end result.
Epicycles in a geocentric model of the solar system is another way of looking at planetary motion. It breaks down due to the required addition of complexity to explain discrepancies between the model and truth, which is the same for this particular situation. In addition to what the CPA said, how does this model work with callable, putable, or floating rate bonds where the interest payment is not known up front?
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You won't end up with the same result, that's the problem.
But it says 'calling all hackers' so it must be the inside scoop.
A very nit picky comment.
In avg, the normal way it creates the liability over time and i would argue that in a colloquial its absolutly fine and doesn't change the message at all.
Discussed at the time:
Calling All Hackers - https://news.ycombinator.com/item?id=41306128 - Aug 2024 (253 comments)
> In practice, buybacks can be used to create what is effectively a shareholder dividend in a more tax-advantaged way. Whereas with dividends, they are taxed as income, and this is realized immediately. With buybacks, they are taxed as capital gains, but crucially the gains are not realized until the asset is sold. This could be indefinitely far in the future, so it's more capital efficient. It has the added benefit that it helps pump the token, and imo this is kind of cute because it marries both the fundamental and speculative aspects.
This depends a lot on jurisdiction.
Some jurisdictions give you a certain amount of dividend income tax free. Some jurisdictions tax your capital gains even when they aren't realised. Lots of other variants exist.
Which jurisdictions tax unrealized capital gains? Asking for a friend so I can avoid passing through.
I don't know if this counts, but I believe Norway taxes unrealized gains (indirectly) via wealth tax. All stock value is on the chopping block come tax time.
I doubt this is a common thing. Whereas the other case (dividends tax credit) is far more common. It impacts those of us in Canada. Our government disincentivizes buybacks and encourages dividends instead. Typically, if you're in a low income bracket, and have investments brewing for decades (with high amounts of unrealized gain) in an unregistered account, it is preferable to get dividends over buybacks.
Denmark is one of them. Germany has something similar. But you can ask your friendly neighbourhood LLM for details on the world's jurisdictions to get a complete list.
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> A common lament among founders, even successful ones, is: "Sometimes I feel like I'm wasting my twenties".
Interesting perspective, I feel like I see this much more attributed to someone working on a meaningless problem for a paycheck at a large company. I guess it speaks to the difficulty in finding purpose in any endeavor in your twenties.
Nice conclusion on what to truly value.
It's basically a tradeoff between wasting your personal life or wasting your professional life. If you get a job that is truly 9-5 (or maybe even a bit less), it leaves a lot of time for forging friendships and relationships and learning hobbies while you're still young, doing sports, seeing the world.
Founders usually feel they're missing out on all or most of these. And some of them probably feel like they don't really have a choice - maybe their specialty/resume is one that's difficult to get hired but skilled enough to make money on their own.
However, plenty of jobs take all your time and still feel meaningless. Many (most? - median personal income in USA is $42,000) don't pay enough for people to really socialize much anyways or do most of the hobbies they might enjoy or travel at all. Generally, having the choice of "HOW should I 'waste' my twenties?" is a fairly privileged one.
Well said. To expand on what you wrote, I like to think of there being three components (axes) to activities: fun, value, and meaning.
Fun is you enjoy doing it. Playing video games and watching TV is fun.
Valuable is it makes money. Importantly, it's what other people are willing to pay you money for, not what you think is important or even good.
Meaningful is it's spiritually enriching. These are things you would regret not doing on your deathbed. Spending time with your family or going to church are common examples of things that are meaningful to people (and potentially fun). This one is defined based on one's internal compass and varies significantly from person to person.
You can come up with activities that are pure fun, value, or meaning. Measuring activities against these three axes has been a valuable mental model for my time management and life design.
There's jobs that are fun and meaningful, but don't pay much. This is like charity work or passion tax industries such as game dev, music, or art.
There's also jobs that are fun and valuable, but are meaningless. Working at a trading firm/hedge fund is a common example (though some people may find that it's all three or only one). Another example is being a successful startup founder working on the wrong problem.
Finally, there are jobs that are valuable and meaningful, but maybe not all that fun. To me, this is what being a startup founder (working on the right problems) or how I imagine a professional athlete is like.
The grand slam would be having all three, but in my experience these are exceptionally rare. If it's fun and meaningful, everyone wants to do it, and supply and demand pushes the value down. Most of these cases are due to unusual personalities that let one find fun or meaning in activities others don't. This ties into the common startup advice of paying attention to "founder-problem fit" and "what are your unfair advantages".
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The median income for a college grad is $80K.
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I have this crazy insatiable addiction to food and shelter. My paycheck supports my addiction.
Thought experiment: you have three sets of 10 recent college grads. One set works as enterprise devs in a tier 2 city, one set works at BigTech and another set works for a startup, which group do you think will have the highest median income after 10 years?
I would much rather work for a “meaningless paycheck” (and RSUs in a public company), than bust my ass at a startup for below market wages and “equity” that is illiquid and will statistically be worthless.
> "Sometimes I feel like I'm wasting my twenties".
Is near universal to anyone in their twenties regardless of job type/sector. It's the start of most people's adult life, and without the lack of experience that age brings, it's natural to question if you're on the "right path" and/or be swayed by potential other opportunities you've not yet explored.
Hell, even with the experience of age, people still often ask themselves that very same question, and not just for their twenties either.
Exactly, I know people who weren't founders, had a typical college experience and then got a "normal" job that look back and feel as though they wasted their twenties because they didn't grind out some start up. Looking back and wondering if you could've/should've done more/differently is a super common experience.
But wagies clock out at 5 and live that half of their lives, severance style.
Startups/entrepeneurs often don't even have that duality and live our single life entirely through work. I would identify with "wasting my twenties" in the sense that the life of the entrepeneur isn't really age specific, it would be quite similar to do business at 20 than to do it at 50. The only difference being experience. But there's not much use of my young body, or libido, strength, that is typical of youth experiences.
This is a critique of the VC ecosystem based on a dichotomy of "inflated" versus "fundamental" value, with a CTA to hackers to "do something about it."
Here's one that better suits the title:
"Pricing Money: A beginner's guide to money, bonds, futures and swaps" (866 points)
https://news.ycombinator.com/item?id=36358754
This smells a lot like a hacker thought because they are exceptional in one field (cybersecurity), they therefore are exceptional in all fields. The result is that information presented in this article is very surface-level, and quite biased.
As a much better alternative, I would recommend "debt" by david graeber, which is amazing.
Graeber is controversial. Archeologists hate how he argues by ad hominem and does not appear to understand the works he cites, to make his argument.
I can't speak to his work on finance as a whole. Regarding deep time, his claims about pre-literate society from archeology are not widely supported, they use thin evidence to argue badly.
His anarcho-socialism isn't the concern. It's his lack of historicity, and inability to bring his peers with him on radical ideas which concerns me.
He's dead, he can't defend himself. So there's that.
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Is your comment perhaps in reference to the comment ‘ the assumptions and estimates that go into it, I recommend Financial Intelligence by Joe Knight and Karen Berman’ and not the parent comment you’ve replied to?
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biased hackers are the best kind of hackers :)
the only thing it takes to be exceptional in most fields is time and effort. there is no secret sauce. There is not something innate that "finance people" have that "computer people" don't, other than a willingness to trudge through boring finance-related crap and vice-versa.
This is all spawned from insecurity that your prestigious degree or whatever can be replicated through independent learning
Being exceptional in cybersecurity is a pretty good indicator that someone will be successful in other fields. A good cybersecurity person will understand that cybersecurity is a mix of technical mastery and the art of understanding human behaviour.
> Being exceptional in cybersecurity is a pretty good indicator that someone will be successful in other fields.
I am not so certain about this. In particular being exceptional in cybersecurity does not make you good at playing political games or having the traits that a lot of bosses want from employees (I will attempt to avoid starting a discussion whether I consider such traits to be good or bad).
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Let me guess - you work in cybersecurity?
This is XKCD #793 all over
The critique of the financial system relies on a misunderstanding of the Discounted Cash Flow (DCF) model.
You conflate 'r' (the discount rate) with 'Rf' (the risk-free interest rate). In reality, for high-risk assets like startups, 'r' is defined by the Weighted Average Cost of Capital (WACC) or CAPM: r = Rf + Beta(Rm - Rf).
Even in a ZIRP environment where Rf -> 0, the Beta (risk/volatility) for a startup is massive. A rational investor would still demand a high 'r', leading to a low valuation. The fact that VCs ignored this and funded "blatantly bad deals" cannot be explained by low interest rates alone. It is better explained by the information asymmetry a.k.a principal-agent problem.
We have a system where capital flows from passive LPs through multiple layers of rent-seeking intermediaries (VCs, LPs, Fund Managers) who are incentivized by management fees rather than carry. The market failure described isn't "financial nihilism" and "financial short-termism". It's a breakdown of feedback loops where intermediaries face no downside risk for misallocation. When there is no market coordination, no real competition, just unrestricted collusion, then things start to not make sense from the old school financial/business perspective. I do not think this is the failure of economic theory or the financial models itself, rather just that nobody knows or tells, that the prerequisite for these things is at least some degree of fair competition, market based economy, informed, rational actors and restricted collusion.
Suggesting that technical founders can fix this by simply "being decent" ignores the systemic reality. This economic structure rewards extraction over value creation, "decency" is an evolutionary disadvantage. The "real hackers" in this story are the financial and business intermediaries who successfully reverse-engineered the economy to extract rent without generating value, similarly to all those entrepreneurs, CEOs, corpo drones in the business sphere who do not provide any meaningful value to society (and shareholders as well.)
I can relate to a lot of things said in the article, both practically and philosophical. Thanks for speaking to/for fellow hackers!
PS: Hackers websites don't have to look this ugly. We do take care of attention to detail that the page have to be rendered for mobile devices as well.
That's primarily not a website, but a hacker zine. That's just the format they come in for historical reasons, similar to RFCs.
I personally also don't love it, but fortunately, hackers have the technology to reflow legacy fixed-width text files to any format of their choosing :)
For anyone looking for basic information of financial statements in business, the assumptions and estimates that go into it, I recommend Financial Intelligence by Joe Knight and Karen Berman. It helped me understand how much fuzziness happens in financial statements and how they can affect a business operation
How does today's Phrack compare with older Phrack
https://www.textfiles.com/magazines/PHRACK/
Have "hackers" changed
If yes, how
Unpopular opinion, but I don't think banks should be able to loan out money that's not theirs, and printing money is bad.
Gold good, paper bad. But also, gold bad, because clipping.
If only there was a solution.
This probably won't make you feel any better, but banks don't really loan out money that's not theirs. When they lend money, they literally create it out of thin air. Creating that money has a cost, which is what ultimately limits how much they can lend, and having more deposits can lower that cost somewhat, but there's no direct connection between the money you deposit in your account and the money that the bank lends to someone else.
That’s a take!
The modern world would collapse in about a week if banks were not allowed to loan out deposits.
The ability to satisfy needs now and pay for them in the future is why you can have a house, why governments can build infrastructure, etc. That’s the only reason that banks really exist. Keeping your deposit safe for you while providing convenient access via cards, checks and other rails is just a wonderful side effect.
After a few thousand years of civilization we don’t have anything better that could allow you to satisfy current needs with future income. Direct loans are just vendors acting as de facto banks, at much higher risk.
A bank product that doesn’t loan out your deposits is called a safe deposit box. There’s your solution.
> The ability to satisfy needs now and pay for them in the future is why you can have a house
The housing market has been greatly influenced by the ability to loan vast sums for housing, and without that we would have a very different housing market but we would still have one.
I think banks should lend but it's probably fair that we have controls on lending, and I think we should probably tighten them up especially around housing.
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> printing money is bad
How can there be more money in circulation if we can’t create more?
Since wealth can increase (there’s more wealth today than 1000 years ago) why would you expect that money wouldn’t?
Or do you think there should always have been only $1 constant dollar for all time?
The problem isn't really that banks can create money. Ultimately it's up to the people whether they trust paper IOUs or not. The trust in IOUs happened organically and would happen again, unless you suggest they should be outlawed (ie. it's illegal to write a piece of paper saying "I promise to pay the bearer..." on it).
The problem is the governments can bail the banks out. After 2008, trust in paper IOUs (or their digital equivalent) should have plummeted, leading people to seek to store their wealth in other ways. But it didn't, because the governments stepped in and said, "nah, we need this to work, so we'll pay their salaries and bonuses with your taxes".
Bitcoin was intended to be a solution to this problem. There's nothing stopped people creating derivatives on top of Bitcoin and trading those. But nobody, no government nor anybody else, can just print more Bitcoin.
> Unpopular opinion, but I don't think banks should be able to loan out money that's not theirs,
Why not, as long as they have the consent of the owner? And all banks have the consent of the depositors.
I was surprised to learn that I am not even remotely close to being a hacker as I knew about maybe 10% of the references here.
most of the financial systems are just as hackable as computer systems, but most "security" startups just build compliance checkboxes and culturally appropriate hacker ethos for VC money.
> but reading indictments to learn from others' mistakes.
Oh oh.
> It's about knowing where to buy estradiol valerate on the internet and how to compound injections
Oh no.
This is 5 paragraphs in, and I already red-flagged out of this, not just because of the time it would take to read this, but because I don't want to go crazy reading this stuff.
In case it isn't clear, it's not healthy to read indictments thinking how to avoid being caught by law enforcement and buying grey market hormones. Politics aside, at least get a prescription, it's not like they are not giving them out.
Hacking is a huge spectrum I know, but if we have to decide on some limits to what is open to be modified and understood by the lay(wo)man, and what is closed and left to professionals, wouldn't we agree that law and medicine would be such fields? (and possibly military?) Trying to hack medicine or law is as extremist as arguing that you don't have the rights to plant the seeds of fruit you buy. As far as rights go, sure people are given the rights to represent themselves pro-se and apparently to buy hormones online, but going beyond what's allowed, are you really willing to ruin your life just to stick it to the man or to exercise your right to do whatever?
"Hacking the law" is how we end up with "sovereign citizen"/"freeman on the land" style nonsense.
How money works? Well look into fractional reserve banking and do the math. If you’re a bank, you can just loan out 10-100 times what you have in assets and ask say 5% interest. Then 5*10 to 5*100 is your annual interest to the bank. That’s why the Bible and Quran are against usury.
That’s not how banking works. Banks cannot lend “10–100× their assets.” Loans are assets. Deposits are liabilities. What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.
The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%.
Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit).
This is a popular myth, not “doing the math”.
What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
> What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×.
I'm with you in principle. But alas there's lots of regulation that muddies the economic waters. Eg reserves do limit lending in some places at some points in time.
> What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
Yes, indeed. People usually get a loan to spend the money (ie invest it). Otherwise, why bother with the expensive loan?
It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.
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I recently discovered narrow banking (https://www.narrowbanking.org/) which basically states the idea of narrow banking which can only make it so that the bank doesn't have the issues with fractional reserve banking if you are worried about it
Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking.
Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
Which require blind faith in reserve numbers.
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Narrow banking was denied a depositor account at the fed IIRC so it's basically DOA as they've envisioned it.
IIRC the fed said that narrow banking threatens the stability of the banking system since private credit expansion (and ultimately, the risks that come with that) is in their estimation desirable. Regulators want nothing but to crush the idea.
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> here already are some gold pegged stablecoins
Something backed by a volatile asset isn't, by definition, a stablecoin, though.
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You are mixing up a lot of different ideas and concepts.
Historically, the combination of fractional reserve banking and the classic gold standard was very successful. Just because your bank uses grams of gold as the unit of accounting (or something that's effectively equivalent to grams of gold), doesn't mean they need to have that much of gold in their vaults. Similar to how today a bank will give you dollar bills when you ask for them, but that doesn't mean they need to have their vaults stuffed full of dollar bills. They just need enough solid assets to sell for dollars, so they can give you dollars when you want to withdraw. (Having some gold or dollars on hand is just a convenience, so you don't have to wait for the bank to liquidate assets.)
About narrow banking: there's at least two different definitions of the idea. What your website describes might be called 100% reserve banking. The website is a bit silly: you can already get 100% reserve banking today, if you want it.
The website is also extremely misleading and dishonest about fractional reserve banking. You can eg just follow their own link to the Bank of Amsterdam and read up on it.
The second definition of 'narrow banking' can be seen at eg https://en.wikipedia.org/wiki/Narrow_banking
> Narrow banking is a proposed banking system that would restrict commercial banks to hold only safe and liquid assets, like government bonds, against customer deposits, while prohibiting traditional lending activities. Under this model, banks would function as custodians and payment processors, separate from the lending function performed by other financial intermediaries.
This is like a normal fractional reserve bank, but the only asset they invest in is government bonds. This can still go wrong, if you are not careful: Silicon Valley Bank invested mainly in government bonds, but had a maturity mismatch. Their long term government bonds lost in value (because market interest rates went up), so they went bankrupt. Alas, they still got bailed out.
You can approximate this kind of narrow bank for yourself, by just putting your money either in government bonds directly, or into a money market fund that only invests in government bonds.
> [...] I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds.
In what sense would America benefit? On an inflation adjusted basis, foreigners often get a negative real interest payment, ie they lose money, for the privilege of lending to the US. That seems like an extremely good deal for America.
> There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
Wise offers to keep your money in a fund and they transparently sell your fund shares, when you are buying a coffee with your card. They transparently buy fund shares, when money comes into your account.
See https://wise.com/help/articles/3luodUQFD9YWzNc8PvIfVK/holdin... and https://wise.com/sg/interest/ and https://wise.com/help/articles/74dYRhMCItIf2IBJLTpFQs/how-do...
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Addendum narrow banking in the sense of only holding government bonds:
I think that should be legal for banks to do, and in fact it's a good argument in favour of eliminating deposit insurance. At least the (explicitly or implicitly) government backed deposit insurance that you have eg in the US. It creates a moral hazard where the incentives for monitoring risks are all but dulled.
People who still want the equivalent of deposit insurance should just put their money into a bank that only invests in short term government bonds: after all, a government backed deposit insurance can't really be safer than these short term government bonds anyway.
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> That’s why the Bible and Quran are against usury.
That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
> It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.)
Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.
This is not correct. For starters, loans are assets.
Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc.
The regulatory capital ratio determines how much capital they must hold to support the assets.
> The regulatory capital ratio determines how much capital they must hold to support the assets.
That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions.
The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios.
Interestingly they barely held any reserves at all, perhaps 2% or less of assets.
These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.
-1 = 1
And people wonder why finite natural resources skyrocket in value.
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> That’s why the Bible and Quran are against usury.
Now let's biblical exegesis to define what is legitimate interest and usury.
The "good" (or "bad"?) thing about these holy scriptures is that they can be interpreted quite freely to fit a personal or institutional agenda.
That's why you have the Pope or the Supreme Court to tell you what the holy scriptures mean.
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This is a common misconception, thinking that fractional reserve banking is the way in which banks lend. In actuality it's a limitation to how banks lend.
Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
> Without fractional reserve rules the banks could lend their money infinitely.
What's that supposed to mean?
> I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements).
The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.
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> That’s why the Bible and Quran are against usury.
The problem with that is they deny the existence of the time value of money, which is essentially a mathematical fact.
It's why Islamic banks come up with various workarounds to be able to charge the equivalent of interest.
You can't loan more than you have, but fractional reserve means you can loan most of your assets while only keeping some liquid: https://en.wikipedia.org/wiki/Fractional-reserve_banking
You can when you control the ledgers. Even more easily when digital. Over 90% of all currency is digital.
> fractional reserve banking and do the math
all models are wrong but some are still useful. This model isn’t useful at all since the fraction was legislated to be 0 years ago.
That's in the US. Canada for example never had any legal reserve requirements.
However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around.
The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves.
If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.
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I legitimately thought the description of a 'shitcoin' was supposed to be a euphemism for IPO shares until it turned out there was a separate section for that.
real learning- copy paste the content and ask for “critical and constructive feedback and potential false narratives from industry professionals” to get 10x from it
https://chatgpt.com/share/695e125f-1254-800a-8661-d7a046f4c2...
From the first sentences, it looks like a 0.1x value. Discrediting the expanded hacker concept just because, criticizing its non-pc language, shaming on the small imoralities (in an industry full of life ruining unethical practices). The list goes on, and I didn't read everything!
In practice, that prompt gets chatgpt role-playing as industry professionals: who knows if it's near or far from the real deal.
Also, reading long texts is good for comprehension. You don't learn with reading summaries, you learn with repetition and even further if write your own summaries.
This article discusses high quality investors. Where do I meet high quality founders? I’d be willing to bet my time on a good one, but all I come across is the shitcoin equivalent.
> Where do I meet high quality founders?
What do you consider as a "high quality founder"? I guess people will haver very different opinion what makes a founder "high quality".
This is basically “how water works” from someone who only knows faucets
> Markets are computers; they compute prices, valuations, and the allocation of resources in our society. Hackers are good at computers. Let's learn more about it.
This guy gets it, okay devs, read this article
what about stablecoins
I think overall, the idea of money is messed up on many levels. What we call 'money' today doesn't even have an identity. It's the most important thing in the world, it's also the most heavily utilized thing in the world but almost nobody knows what it means.
- It's backed by nothing.
- It's not a fair medium of exchange because it physically cannot circulate very far from 'money printers' (not many hops) before it's taxed down to nothing. This means that it's unevenly scarce based on social proximity; unfair by design. Cantillon effects on steroids.
- It doesn't even exist as a single cohesive concept; the US dollar in your bank account is not the same as the US dollar in your friend's bank account and it's not the same as the US dollar which European traders use to buy derivatives (e.g. Eurodollars)... There are literally thousands of different ledgers (banks, institutions, in different countries), each presenting its own interface supposedly showing their holdings of this mythical unit called 'The US dollar' which is actually thousands of different currencies, which happen to share the same name, scattered around the world and held together only by regulators whose only shared interest is to print more units for themselves than the next guy does. Slow and fallible human regulators represent the only layer of 'consensus' which exists for the entire fiat monetary system; they move at snails' pace in a world of high frequency trading.
> - It's backed by nothing.
Money is never backed by nothing, or it's worthless. It may not be backed by anything physical, but it's always backed by some form of trust. National currencies are backed by trust in the corresponding government and institutions.
But that trust is often backed by nothing. Especially if you don't own assets; then from that perspective money is really working against you and is backed by pure coercion... But coercion is not an asset and it doesn't have net positive value; at least not to the victim.
It has value from the perspective of the oppressor I guess... I think this is where it derives its value.
I was disappointed this wasn't about how money itself works - instead it's about various financial arrangements you can use to scam people.
There's a lot of stuff to talk about with how money works! Like, when I use my Visa card issued by a New Zealand branch of an Australian bank to buy something in Europe, there are zillions of moving parts there.
The fact that money doesn't actually move internationally but yet appears to, and the fact that currency exchange can be done despite that. And that 60% of everything is backed by US dollars (rapidly dropping now). How bank transfers work with and without a common central bank; the different mechanisms countries set up to streamline them.
And, the fact that it's not really centrally controlled, and anyone (like Satoshi Nakamoto) can make a currency and there's not really anything a government can do to prevent currencies it doesn't like, and despite that we do mostly have one government-issued currency per country.
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I'm an ant. I want to tell you how the chemical trails work. Here is how the pheromones work....
Except. The main point of chemical trails, money or other implementations of the messaging bus of a complex adaptive system is THE COMMUNITY it creates. Think the Sapir-Whorf hypothesis, but instead of language determines what you think, expand that to "your messaging bus language determines how your community functions". Yeah there is lots of stuff about money, but how it determines the form and function of the community (as in CAS) is the important part.
The other primary thing to think about money - once you get that it is a messaging bus - is the idea of making money from money. When you understand the function of the system you can then understand that making money from money is not a good idea. This is not a new idea. The concept of throwing the money lenders out of the temple has been around for a long time.
If you understand money, then you will be able to answer this question:
why is making money from money a bad (dysfunctional) idea?