The Forgotten Foundation: Why Capital Formation is the Cornerstone of Any Financial System
Without trusted capital stock, financial systems break down
Capital formation is the most critical component of any financial system. Without a stock of assets that the market perceives as having lasting value, the entire structure of modern finance collapses. Interest rates lose their meaning. Credit becomes untethered. Economic activity is reduced to speculative noise.
This is not a fringe idea. It's the core insight shared across frameworks developed by Ray Dalio, Lawrence Lepard, and , among others.
Each of them, in a different language and through different models, points to the same foundational truth: without trusted capital stock, financial systems break down.
Capital as Survival: A Household, A Business, and A Country
Imagine a household as a microcosm of a financial system. For a family to function, grow, and eventually retire in security, it must accumulate a capital base. That could be savings, investments, and/or property. However, it must consist of productive assets because this capital pile provides the basis for stability, optionality, and resilience.
If the household merely rents, never saves, never owns assets, and instead depends on rolling 0% interest credit card offers; it survives only temporarily. Eventually, the debt compounds. Credit lines dry up. The family is forced to either drastically cut back or go bankrupt. Businesses are no different, and that is, in essence, the position modern central banks find themselves in today.
Central Banks believed they could outmaneuver the basic laws and principles of money. They believe they are exempt from the disciplines of capital formation. They aren’t. Framing the problem in terms of a single family unit helps us to more clearly recognize the systemic issues in play.
Lepard, Dalio, Howell & Pines: Three Lenses, One Truth
A good friend, Lawrence Lepard, devotes pages 49-55 of The Big Print to this idea of capital formation. He captures it very succinctly on page 55:
Ray Dalio, in The Changing World Order, lays out a similar arc. When trust in capital stock is eroded, systems transition from credit expansion to deleveraging and social conflict. They must then reset — either through inflation, default, or innovation. The long-term debt cycle always ends in the same place: the need for new capital formation.
Here, Dalio emphasizes the importance of saving (spending less than you earn) and understanding how capital flows from your income through your balance sheet so that you have control over shaping your future. Remember, money is about control.
Dalio explains this again in his latest book: How Countries Go Broke: The Big Cycle (expected June 2025).
Michael Howell brings this into the big picture, liquidity terms. In his conversation with Marty Bent, between the 3 and 25 minute mark, Howell focuses on the importance of balance sheet capacity and its impact on liquidity. Again, without adequate collateral, liquidity dries up. The system has no leverage anchor, and credit grinds to a halt.
As I noted on X, and as echoed by each of these publications, capital stockpiles are critical to financial systems. Interest rates signal whether a system is functioning or broken.
Over 200+ years, interest rates naturally ranged between 5% and 9%.
These were the levels at which real capital was formed, savings were rewarded, and investment was disciplined. Starting in the early 1900s and again post-2008, rates fell through the floor. Not because of increased productivity, but because the system had no real capital left. Through derivatives and financial engineering, it morphed into a system based on debt.
Persistently low rates are not a gift. They are a red flag of grift and musical chairs.
The little-mentioned financial truth is: low rates are a warning that the system can no longer self-sustain amidst the financial engineering taking place. They are a desperate bid to keep credit alive without enough capital to support it.
Bitcoin: Emergent Behavior + New Capital Formation
Bitcoin isn’t just a monetary asset. It is a system. It is the first monetary network that stores value, is instantly settleable, and provides insight into real-time liquidity. Oh, and it’s scarce too. Like land. Like gold. But native to our digital world.
What Michael Saylor and the ETFs are doing with Bitcoin is capital formation - stockpiles of Bitcoin.
While it’s still to be determined if this is a good or bad thing, stacking durable, incorruptible collateral is the bedrock of every financial system known to man. This is the not-so-silent revolution. If successful, and once a critical mass of capital moves to Bitcoin, it forms a new base layer — one that can support new credit systems, leverage, and trust.
*Hopefully* this time, on-chain metrics will keep shadow banking from disrupting the system as they’ve traditionally done.
I found this conversation between Matthew Pines and Danny Knowles on What Bitcoin Did (WBD) to be critical in our understanding of what comes next. Yes, I’m biased. I already share the view. However, Pines articulated well.
He positioned Bitcoin as the superior monetary asset. One derived from emergent behaviors required to reset a system. In the language of Geoffrey West’s Scale, emergent behaviors are how complex systems survive. Bitcoin is this. It is an innovation out of an emergent community. Bitcoin is a survival response for our financial system. Worst case, it’s a liquidity spigot.
Bitcoin represents the upgrade of two systems at once:
The unit of account (like the dollar, euro, yuan)
The settlement network (like SWIFT, Fedwire, Visa)
The last time this happened? Never *(maybe in 1950 with the credit card network).
A New Monetary Lineage
Zooming out, we can trace monetary systems as an evolutionary lineage:
Land / Gold → tangible capital
Central Banks / USD → credit-based abstraction, debt capital
TCP/IP / data → digital information, data capital = new oil
Bitcoin / bitcoin → digital system + digital money
Each step has reflected the prevailing needs and technologies of its era. Bitcoin is the next logical step. Not because it’s trendy, but because the current system is exhausted. Like a household, at what point can it not be fixed with tweaks? At what point is a remodel required? At what point is new capital required?
Conclusion: The Capital Stack Rebuild
What Dalio, Lepard, Howell, Saylor, and Pines are all pointing to is this:
Without capital formation, there is no interest rate integrity. No credit expansion. No long-term economic stability.
Bitcoin is not just "number go up."
Bitcoin is capital stock. Bitcoin is base layer trust. Bitcoin is the innovation that allows a global reset and hopefully avoids traditional war. Though a financial war seems to be present under the surface.
That’s why capital and sound financial decisions matter. That’s why it’s happening now.
Bitcoin and the broader cryptocurrency ecosystem are not just an upgrade to our financial system, but to our information infrastructure as well. At the same time, it is challenging the traditional and often inefficient role of Central Banks.
Whether or not nations saw this coming, by 2025, global leaders have taken note.
The question isn’t if we rebuild the capital stack.
The question is: who controls the keys, or are they shared, once it’s rebuilt?