Fiat Money Is Worth Nothing

In today’s post, I want to bring you a new concept that perhaps you haven’t heard before, Fiat money. An idea that corrupts the system from inside and your pocket too. In the process, I will explain some of the consequences of its use.

This is the first of a series of posts where I will explain why the US recently committed economic suicide, what bitcoin is and what solutions it offers.

What is Fiat Money?

Fiat means “by decree”, in this context, by governmental order. In today’s system, the government issues its currency without backing it up with a commodity. This means that the currency does not have a physical representation in the world. It is just paper. In the past, each banknote would represent a piece of gold somewhere in the bank, but today does not represent anything.

These currencies are tied to supply-demand rules. The more the world buys them, the higher value they have. And the more they sell them, the less value. Also, the more abundant they are, the less valuable and vice-versa.

A more complex way to look at it is that if the amount of money increases faster than the rate of how much the money is wanted, prices of goods and services rise.

In the graph below, you can see the number of billions of US dollars across time. Look how its amount has increased, especially since 2020. This is the true origin of inflation. Money is created into existence faster than the market can absorb.

Central banks are responsible for controlling the amount of money out there, which, as you can see from the latest inflation data, they are not that good at that. But this type of system brings more disadvantages.

What are the consequences of using fiat money?

The following list shows some:

It corrupts the political institutions: Because fiat money can be created out of thin air. Governments no longer need to reach compromises to implement their policies. They just pay for them by printing. War is one of the clearest examples of this. Governments finance the war through inflation by printing new money. If governments did not have this possibility, wars would end quicker because governments would go bankrupt, and they could no longer afford the fight.
It enables inequality: The new money is not distributed equally across all populations. And those that are closer to the printing machine get more benefit out of it. In today’s world, our beloved political and banking elite are the ones. An example of this would be how the banks were bailout in 2008 during the Great Financial Crisis.
Enables inflation: Inflation is caused by increasing the amount of money in the system. If the amount of money were constrained or fixed, inflation would not exist.
It is fated to disappear: All fiat systems through history have failed. If by design, the currency gets devalued over time, eventually, it will reach 0. Here is a list of failed currencies and their life span.

To be fair, I got to say that a Fiat currency is a very cheap system to maintain, very flexible that, if well managed, works. However, managing it falls in the hands of politicians and central bankers, and at the end of the day, it’s not trustable long term.

Conclusion

Fiat money is the origin of many of today’s situations, like why it gets harder every year to pay the bills or why governments increase the budget for defense so easily.

This is an important concept to understand because all economic and political decisions taken by governments derive from it. From here, we can explain many other concepts, such as bitcoin, geopolitical dynamics, and much more. Just subscribe and stay tuned for the next post.

If you want to know more about fiat money and its alternatives. I recommend you the book “Bitcoin Standard” by Saifedean Ammous. In a few chapters, he reviews the history of money, especially in the 20th century. In video format, take a look at his conversation with Jordan Peterson here.

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