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All our current money is fiat. There isn’t a single government anywhere in the planet that has not imposed paper fiat money. Some of them (a very few) still accept silver and gold coins as a method of payment, but they are a minority and do so only as exception.

Modern fiat money is not only fake, but it is based on a fake “fractional reserve system”.

A fractional reserve system, as you may remember, is when a bank issues more warehouse receipts than the amount of gold or silver they have in store. Therefore, they only reserve a fraction of what they lend. In other words, they lend more than what they have.

Can you imagine going to a supermarket and buying a ticket for a bag of apples, paying for it and at redemption time (you want those apples, don’t you?) being greeted with the notion that the ticket is not redeemable because a customer before you already took all the apples in stock!?

Yes, the fractional reserve system is exactly that. It is a scam. Counterfeit. A complete and utter fake.

However, governments not being satisfied with a fractional reserve system based on gold (they could only print up to the point at which they would be able to redeem in normal circumstances or 90%), they decided to get rid of gold altogether!!!

Now that people were using fiat money every day, they made that fiat money non-redeemable. Again, if we refer to our little apple example from above, at redemption time (you still want those apples, don’t you?) being greeted with the notion that the ticket is not redeemable, at all!? Just because the supermarket say so!!?

This non-redeemability meant in practice that they did not need any gold or silver and could print as much as they wanted. And so the concept of “fractional reserve system” went from a gold-based joke to a thin-air-based joke (the joke being on us, of course). There no longer were any ties to anything remotely related to commodity-based money.

The so-called reserve in a fractional reserve system simply means that the government can print as much reserve as it wants. These so-called reserves are meaningless, virtual and a total and utter fake.

For private banks this is not quite so, since they are forced to keep roughly 10% in their vaults of all the money they lend, and they are only allow the create money out of thin air at an approximate rate of 1:10 in relation to their “reserves”.

And so, we now live in a system that has fake money based on fake reserves supported only by blackmail and threats from the government. Depressed yet?

Cui bono? (who benefits?) Governments (this is to say politicians and bureaucrats) and “friends” of governments. And the rest of us? Thank you very much!


Real money

In our previous lesson Real Money For A Real Economy, we saw that when we use real or commodity-based money, this money is used as an intermediary in the exchange of goods and services. The value of the exchange (and in this case the price) are the same and can always be traced back to the exchanged goods and services.

This is, if I barter one bag of apples for two gold coins, and then I barter those two gold coins for a bag of oranges, I know that the price of one bag of apples or one bag of oranges is two gold coins. However, if I remove the gold coins from the equation, the end result is that I exchanged one bag of apples for one of oranges. Therefore, the real value (and price) of one bag of apples is one bag of oranges.

Bartering with two gold coins

Now let’s assume that I perform the barter in the same manner, but this time I use only one gold coin. I barter one bag of apples for one gold coin, and then I barter that gold coin for a bag of oranges, I know that the price of one bag of apples or one bag of oranges is one gold coin. If I again remove the gold coin from the equation, the end result is that I exchanged one bag of apples for one of oranges. Therefore, the real value (and price) of one bag of apples still is one bag of oranges.

Bartering with one gold coin


Let’s do this exercise backwards. Let’s assume that in the entire world there are only 2000 gold coins. Also, let’s assume that in the entire world, there are only 1000 bags of apples and 1000 bags of oranges. If we now divide coins into each type of bags, we can obtain their price which is 2 gold coins each bag. Same as before, I sell my bag of apples for 2 coins and then use those two coins to buy one bag of oranges.

If we repeat the experiment but now assuming that we only have 1000 gold coins, then each bag is worth 1 gold coin each. Same as before, I sell my bag of apples for 1 coin and then use that 1 coin to buy one bag of oranges.

In either case, I still end up with one bag of oranges!!! Did it matter if the total amount of gold coins in the world was 1000 or 2000? No. It did not matter. What mattered was not the price, but the value of apples to oranges.

In other words, when we are dealing with real money, the total amount of money in the market does not matter because it adjusts to the value of goods and services we are bartering with. What matters is the value of those goods and services, not their price. In other words, it does really not matter what the price is, since price is simply an intermediary.

Fake money

We can perform the same calculation with fiat money assuming its total amount remains constant arriving at the same conclusion. The total amount of money in the market does not matter.

A consequence of this fact is that by increasing the amount of money we are not actually increasing wealth. Does it really matter if I sell my bag of apples for 1000 aluminum coins and then I purchase one bag of oranges for 1000 of the same coins? Not really. I still end up with one bag of oranges. If I increase the amount of aluminum coins in the marketplace from 1000 to 10.000 did this increase the amount of apples or oranges? Obviously it did not.

Yet, strangely enough, we keep hearing from government officials and their economic puppets that “there is no enough money” in the market. That we need to increase “liquidity”. That inflation is “too low”. Why? Why is that it is so critical to increase the amount of money if we have just proved that it makes no difference?

Cui bono? (who benefits).

If you would say the government (i.e. politicians and bureaucrats) and their friends, you would be correct.

Let’s now take a look at how would similar transactions work with a government. Let’s say that only 1000 bills of 1000 Philippine Pesos were ever printed.

 New philippines 1000 pesos bank note

And let’s say that there are only 1000 bags of apples and 1000 bags of oranges available anywhere in the Philippines, and no exports or imports are allowed.

Knowing this, we can calculate the price of each bag as one Philippine 1000 Pesos bill. In other words, one bag = one bill. Same as before, I can sell one bag of apples, get one bill and then use this bill to pay for one bag of oranges. Net result? I end up with one bag of oranges.

Now let’s say that the Philippine government prints another 1000 bills but it does not tell anybody. As long as those bills are not circulating, it makes no difference. However, governments print to spend.

Now, let’s say that the government uses 100 of those new bills to purchase 100 bags of apples. There are now 1100 bills in circulation. Apple bag owners they realize that there is an increased demand and estimate the new price of a bag of apples as 10% over the previous price. If we would to do the actual calculation, the new price would also be 1100 bills / 1000 bags = 1 and 1/10 bills each (or 10% more than before).

Unfortunately, my salary is the same as it was before the government purchased the bags of apples. So, when I try to purchase one bag of apples for one bill, it now costs 1 + 1/10!!! The market adjusted the price to the new quantity of money, unfortunately, may salary did not adjust because neither myself nor my employer knew that the government just used 100 brand new bills!

Now, let’s assume that those 100 bags of apples were purchased from “friends” of the government. These people immediately bought 100 bags of oranges at the “known” price of 1 bill per bag. They purchased the oranges at 10% discount because they know that the new price of oranges is 1 + 1/10 bills.

Cui bono? The government because it printed the money out of thin air and their friends, because they were the first to receive payment before anybody knew what was going on.

And you? And me? We are stuck with our old salary trying to get a raise… which will be mighty difficult because now everything costs 10% more, which means that the company we work for needs to pay 10% for their raw materials. Do you think a company in such circumstances will be willing to give me a 10% raise? Of course not!

And so we come to the conclusion that the amount of money matters as long as somebody is cheating and creating it out of thin air. This newly minted money benefits first users but damages latter users. This means that what the government purchased, it did with wealth taken directly from our pockets! This process is only possible with fake money since real money cannot be manufactured. This is yet another reason to prefer real, commodity-based money over fiat at any time because it prevents governments from cheating.


In the end, it is quite simple. If the amount of money matters “for our own good”, as politicians’ puppets say, then why not make public the amount of new money that Central Banks create? This is not that difficult. Although it is true that money is created in many different ways, Central Banks can always calculate what will be the total amount of money created once the full cycle is trough. Yet, for some mysterious reason this information is kept very strictly confidential. Wouldn’t there be something else going on?

If can know with almost certainty what the final amount of printed money will be, then why bother calculating inflation at all? Simple, because inflation is a misdirection move. In the same manner as magicians direct your attention to their right hand while doing something with their left hand; Central Bankers direct your attention to inflation while printing gigantic amounts of money in the background.

The trick is simple. When Central Banks create fake money out of thin air, this money is not created instantaneously. It takes anywhere between 6 months to a year to see the full effects. During that time the government has the exclusive first use of printed money. See? Inflation is low, they say. Why are you complaining we are printing? They say. Misdirection. Trickery. They know full well that inflation is coming, they are just buying time and playing dumb.


In a free and honest market, the amount of money does not matter. However, in a rigged market, when somebody can create “new” money out of thin air, this fake or fiat money becomes a wealth-shifting tool. A Hood Robin that takes from the poor and gives to the rich.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to Fake money for a fake economy - Part 4


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