Everything begins and everything ends. Everything is born and everything dies. The Greeks knew this. They used their alphabet to emphasize this fact when their referred to the first (Alpha) and last (Omega) letters in their alphabet. However, in the case of fiat money, does it have to be this ugly? Today we are going to take a quick look at the Alpha and Omega of funny money or “legal tender” as the official counterfeiters prefer to call it.
What is Money?
Money is simply the means of exchange. It is “stuff” a “thing” that everybody accepts for goods and services. It is an intermediary between what we want and what the other person wants. For example, I want a new car, so I give the car dealer money. The car dealer doesn’t really want money, what he wants is a new fridge, but he knows that the fridge dealer will take money and give him a fridge.
And so, money lubricates transactions. It makes us independent from bartering. It allows us to barter in small chunks. It allows us to store “wealth” in a way that it will not spoil. It allows us to barter fractions of our goods and services.
Money is indeed very convenient, and that’s why everybody uses it.
The Origins of Money
We don’t really know who first came up with the idea of money. However, we know that the general idea of it was to have something valuable, something that everybody would accept as valuable, and use this thing as money.
Different civilizations tried different things. From shells to fruits. From wood to salt and everything in between. Eventually, everybody settled on precious metals. It was something that was agreed by the free market. There was proposal, vote or plebiscite. Market participants simply acknowledged the superiority of precious metals as money and accepted them as such. It just happened.
What is price? Price is simply the amount of money a person is willing to accept for a good or service. This price is determined by subjective calculations between market participants. There is no objective rule that will determine a price of anything. We cannot calculate what the price of a given thing should or will be.
This is so because prices depend on people and each one of us is different from everybody else. Everybody has a different reason for wanting a lower or higher price (depending if you are buying or selling). Everybody has a different tolerance for profit margins and utility margins.
In other words, everybody things differently about how much profit is enough or how expensive is an item.
Until those people meet in a free market and they actually exchange money to conclude a transaction, we don’t really know what price will they settle for. The price is unknown. That’s why economists talk about “price discovery”. Prices are “discovered” through transactions in a free market.
However, over time, a sort of consensus develops in the free market. Prices tend to averages, or what most people consider the “right price”. If nothing changes in the market, that price remains the same over time.
In other words, if there is a certain number of gold coins in a village and certain number of farmers, the price of a pig will remain more or less constant. This is so, because the amount of gold is constant, and the number of pigs that are born over time also remains constant.
This is true price stability.
From this, we can deduce that if the amount of gold increases because a new gold mine just opened, but the number of pigs remain the same, the price of the pigs will go up. There is simply more gold for the same amount of pigs. The reverse is also true. If a new farmer comes to town selling pigs, then the price of pigs will drop. There are more pigs for the same amount of gold.
The first phenomenon we call inflation. The second we call dis-inflation.
What do we call “honest money”? This is money that cannot be counterfeited. Typically precious metals. Nobody can create gold out of thin air. We cannot print gold. We cannot decree that something is gold.
Why do we call it honest?
Because this money cannot lie to us. All market participants know how much money is in circulation. This amount rarely changes, and when it does, it does so for very little time.
Also, because this money cannot be created at will. We are all subjected to the same rules. Nobody can physically cheat. We are all forced to be honest.
For example, the last time in history when there was true gold inflation, was after the Spaniards re-discovered the American continent and plundered massive amounts of gold. Then, they transferred this gold to Spain, when it created gold inflation. Too much gold chasing too few goods and services. This was more than 500 years ago. We sincerely doubt that any such discoveries will happen in the near future.
Therefore, prices in honest money have the tendency to remain constant. Consider this; in Rome (about 2000+ years ago) the price of a good tunic was about one gold coin. Today, the price of a good suit is about one gold coin. This is true price stability.
Honest money fosters price stability. There is no inflation with honest money.
The Origins of Fiat Money
What is the meaning of “fiat”? If you look in the dictionary, you will get to the correct definition. A “fiat” is an arbitrary decree from an arbitrary and absolute authority.
Therefore, “fiat money” is simply “something” that was pronounced as money by an arbitrary decree from an arbitrary and absolute authority. In other words: government.
Fiat money is simply paper that the government has decreed it is money. Fiat money was never chosen by any market. Fiat money has no validation by any market. Fiat money is whatever the government says it is money, for whatever reason the government says it is money.
It is that simple. Fiat money is an arbitrary imposition by governments onto us.
Fiat money is what the government is doing to us simply because it can.
The Benefits of Fiat Money
What? Fiat money has benefits? Of course! Just not for you. For the government, or more precisely, for politicians.
Because the government decrees what is money, it can decree money to be anything they please, particularly printed paper.
As printed paper can be created out of thin air (all you need is paper and a printing press), it can be willed into existence.
When a government needs more money, it simply prints it. It does not have to survey to find a gold mine. It does not have to extract it from the earth. It does not have to purify it and coin it. It just decrees that more money be created and presto! They have all the money they need.
Wouldn't it be nice if we cold just go to our printer and print money? Well, the government can and does!
There is no limit as to how much fiat money can be created out of nothing. In this manner, politicians can spend and spend and spend so that they can keep their jobs. Nothing wrong with it, right? Well… not exactly.
What is “price instability”? It is a phenomenon that occurs when a large disrupting force enters a market. Typically, it occurs when a natural disaster of large proportions is felt. A tsunami. A volcano eruption. A massive tropical hurricane. They will all disrupt markets. Goods and service will become more desirable and therefore more valuable. Prices will go up as people bid for a fix amount of items.
Strange at it may seem, this kind of price instability is rare.
Most of the time, price instability is caused by governments printing money. As there is no limit to how much money they can generate out of thin air, they do. The rest is simple math. More pieces of phony money chasing the same amount of goods. Presto! Instant inflation.
Inflation = price instability.
You cannot buy tomorrow what you have bought today at the same price. The market has become unstable.
Fiat money is dis-honest money. It is so because there is one party that controls its quantity: the government. They can create it out of thin air. They can spend as much as they want without any repercussions (for them). In essence, they are cheating.
Think about this. When a government first prints money (or more likely it just creates electronic “funds” out of thin air by adding zeros after a one in a computer), it gets this money first.
As the market is not aware that a tsunami of “freshly minted” money is on the way, the prices remain the same. The government buys at current price with just printed money. However, once this money goes into circulation, the market becomes aware of the new quantity and adjusts the prices up accordingly. When you go to buy the same item that the government bought, the price you pay is higher than what the government paid. Presto! Inflation.
Fiat money is dishonest money because somebody (the government) is being dis-honest. It is telling us that prices should remain constant but on the other hand, goes into a printing and spending binge which will push prices up.
In this manner, we are always playing catch-up. Our salaries and our profits buy less and less every day. There is no end to it. Somebody is robbing us and there is nothing we can do about it.
Dis-honest money. Fiat money. One and the same.
Dis-inflation is a good thing. Yes, we know, we know. You have been brainwashed by all those Keynesian idiots out there, or more precisely, manipulators.
The truth is this. Dis-inflation is good if you have honest money. Dis-inflation is bad if you have dis-honest money.
The reason is straightforward.
The main property of honest money is that its quantity remains more or less constant. As manufacturing increases its efficiency, we get more goods and services for the same amount of money. Your money buys more as times goes on. Dis-inflation, at your service.
The main property of dis-honest money is that its quantity increases over time, well beyond manufacturing efficiency increases. We got more money for less goods. Your money buys less as time goes on. Dis-inflation, stealing your wealth.
Inflation is never good. Yes, we know, we know. You have been brainwashed by all those Keynesian idiots out there, or more precisely, manipulators.
Inflation is always more money chasing less goods. This means, higher prices. You tell us, does this sound like something desirable for you? We thought so.
And yes. We also know. They will tell you that printing is necessary to lower borrowing costs. Printing is necessary to increase government spending and hence “stimulate” the economy. They will tell you that the whole thing is complicated and that you don’t understand it. They will tell you that their sophisticated models have everything under control and that they know what’s best for you.
Yes, that’s right. It is all bull manure. After all their sophisticated equations, models and explanations; after all their academic papers, manuals and theories, they cannot hide that the only think they do is to print. Print. Print. Print and then print some more.
They do so because they are locked in a vicious theoretical and political cycle. They do so because that is the only thing they know how to do.
Then why do they tell you that dis-inflation is bad? Because they equate dis-inflation with depression. They are two vastly different thing.
Depression is when an economic system collapses. Strangely enough, if you study history, there were no depressions when honest money was in place. Depressions are a modern invention. Depressions appeared soon after government started printing money. Coincidence? Not at all.
Dis-inflation is when the amount of money remains the same while the number of goods and services increases. Strangely enough, dis-inflation was the way of life when honest money was in play. As soon as this money was replaced by phony money, dis-inflation disappeared and was replaced by inflation. Coincidence? Not at all!
Get this into your head: There is no good inflation. Period!
The Main Problem with Inflation
The main problem with inflation is not that it rises prices. This is simply the most noticeable side effect.
The main problem is that it distorts the price of money.
What is the price of money? It is the interest rate that you pay when you borrow money. This interest rate is actually a very good indicator of economic health.
If we had honest money and the economy would be good, banks would be eager to loan money to charge interest rates. They would be happy to do so because the chances of a company going bankrupt are low. Hence all the banks would compete to loan you money. More competition = lower price. In this case, lower interest rates.
The opposite is also true. If the economy is not doing so well, banks know that a certain percentage of loans will be bad. Companies will go bankrupt. Therefore, they will demand a higher interest on loans to cover their losses.
Presto! The interest rate is a barometer of market health.
Companies looks at this barometer and determine if it is a good idea to start new ventures or sit tight until the storm passes.
This is, if you have honest money.
But what happens if you have dis-honest money? The government is pumping worthless money into the market. Much more money is suddenly available to be loaned. Banks need to loan more, therefore they make it attractive for borrowers to do so by lowering interest rates.
Supply and demand. The problem is that this excess supply is not visible. Companies still assume that the interest rate is reflecting economic health, when in reality is simply reflecting excess supply.
So, companies start new ventures at precisely the wrong time. The government is pumping money into the market precisely because the economy is not doing so well, to “prime” it. Companies get into debts in an economic environment where their chances of success are much lower than normal. And what do you think happens next? You got it. They fail. When they do, they drag other companies with them and the economy sinks further prompting the government to print more money.
A death spiral into economic oblivion. All thanks to phony money and politicians.
The Intrinsic Value of Fiat Money is Zero
You may have heard this, but what is its meaning? It simply means that as governments print more and more, the amount of money in circulation is so large that eventually, you will need an infinite amount of it to buy anything. It has reached zero value.
Of course, in practice this does not happen. Governments go into crises and they change monetary units. They shuffle zeros to the left. They sell everything they got. They borrow. They cheat, lie and twist reality. Anything so that the truth continues to be hidden. The emperor has no clothes. Fiat money is worthless. No worries. You pay the price.
They can spin this for a very long time. They have been doing so for over 200+ years. However, once in a while, a honest country (in a strange manner) does appear. In these unusual cases, we can see what is going on in reality. Reality slaps us in the face.
And so, without further due, allows us to introduce Alpha and Omega.
This is how it starts
This I how it ends.
In this case, the difference between Alpha and Omega is 100.000.000.000.000 to 1.
Think of it this way. When it started, you could buy a chewing gum for 1 Zimbabwe Dollar. When it ended, you needed One Hundredth Trillion Zimbabwe Dollars to buy the same gum.
What is One Hundredth Trillion Dollars?
It they would be US dollars, you could buy:
- The entire US debt including off-books liabilities (a mere 70 Trillions)
- 12% of the world-wide derivative market (800 Trillions)
- All the goods and services produced in the entire world for one year (a mere 70 Trillions)
Scared enough? You should be. Fiat money is not a “peccadillo” (little sin) that government have done. Fiat money is the ultimate Weapon of Mass Destruction and it is coming our way. It is inevitable. It is relentless. Nobody can stop it. And you now know whom and why to blame.
It’s your choice. Do something or do nothing, but when the proverbial manure hits the air current generating device, don’t come back to use crying. We told you. We are telling you. We will that we told you so.
Note: please see the Glossary if you are unfamiliar with certain words.