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  • Writer's pictureJonathan Buck

The Inflation Scam of the Fiat Money System

Money, an indispensable part of our contemporary society, serves three critical roles. It acts as a medium of exchange, functions as a unit of account, and importantly, serves as a store of value. However, the transition from the gold standard to a fiat money system has put this last function - the ability of money to preserve its value over time - to a severe test. This shift has significant implications, particularly for the less affluent in society.

In the Golden Era of Reliable Money

Once upon a time, gold was the pillar of our monetary system. It provided stability and assurance that our money would hold its value over time. Regardless of social standing, people could save money in the most basic ways, confident that its worth would remain steady or even slightly appreciate.

Fiat Money: A Double-Edged Sword

The shift to a fiat standard, however, changed the game. Born out of the need for governments to finance wars and to increase economic intervention, the fiat system gave governments the power to create money out of thin air. This introduced new challenges, with inflation topping the list.

Inflation, the overall increase in prices coupled with a decline in money's purchasing power, was an unforeseen consequence of this new monetary landscape. Under the gold standard, inflation was a non-issue because the finite supply of gold prevented governments and (central) banks from artificially expanding the money supply.

Inflation: A Hidden Wealth Eroder

In today's world, saving money has become a challenge. The silent thief that is inflation gradually chips away at the value of savings, making wealth accumulation a steep uphill battle. Many people live from paycheck to paycheck, caught in the vicious cycle of inflation.

Escaping this cycle requires investment. But investing isn't a walk in the park. It needs long-term commitment, financial know-how, and a cushion of savings that can be locked away without causing distress.

Inflation: Necessary Evil or an Illusion?

Economists like John Maynard Keynes argue that a bit of inflation is essential to dodge the Paradox of Thrift. This theory suggests that if productivity leads to consistent price drops, consumers might postpone purchases, hoping for better deals. This could potentially dampen demand, leading to lower production, job cuts, and a faltering economy.

However, even in a deflationary environment, people will continue to consume for several reasons:

  • Essential Needs: Basic necessities such as food, water, clothing, shelter, healthcare, and energy cannot be indefinitely postponed.

  • Perishable Goods and Regular Services: Many goods and services have a limited shelf life or a defined consumption cycle, which cannot be put on hold indefinitely.

  • Quality of Life and Immediate Gratification: Consumption is also about enjoying life now, not just hunting for the best deal.

  • Technological Advancements and Obsolescence: Consumers often opt for current technology to avoid using outdated products, even if they expect prices to fall in the future.

  • The Income Effect: If prices fall, consumers' purchasing power increases, even if their nominal income stays the same, which can encourage consumption.

Contrary to the popular economic narrative, inflation isn't necessarily a sign of economic growth. It can act as a destructive force, particularly for middle and lower-income groups, by eroding their purchasing power and discouraging saving. Actually, only the government needs inflation, to devalue their rising debts (and fund their wars).

Looking Ahead

Our transition from the gold standard to a fiat system has greatly undermined money's ability to serve as a store of value. This impact is most severe among the less privileged, who often lack the resources to protect themselves from inflation's eroding effects.

While it seems improbable that we'll return to the gold standard, there's an increasing need to reassess our understanding of money and its role in our economy. As the notion of inflation as a necessary evil comes under scrutiny, the conversation around sustainable and equitable economic policies gains momentum.

Given Bitcoin's inherent stability, it is plausible that governments may feel compelled to adopt a Bitcoin standard sooner rather than later.. This could lead to a more predictable and stable economic environment, one where money truly fulfills its role as a store of value, unit of account, and medium of exchange.

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