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FIAT MONEY IN FROZEN QUANTITIES

We have seen above that the quantity of money does not matter in either fiat or real money, if no new money is created.

This has led well intentioned people to propose a system where governments still issue fiat money, but only once. Theoretically speaking, it could work… however… and there is always a however… can you trust politicians to never, ever print under any circumstances? Of course not!

Knowing this, these well intentioned theoreticians, then postulated to print only the amount of money equal to the productivity of the country. The idea was that if the economy grew 2%, then 2% of new money will be printed. The problem with this concept (making aside the fact that politicians cannot be trusted) is that people do not benefit. In a real money market, if the economy grew 2% this means that your money is now 2% more valuable! If the government prints this 2%, the value goes away because the government took it, there is no benefit! They have just neutralized the market!

There are many other schemes like these ones. All of them pipe dreams!

BITCOINS

But… But… But… what about Bitcoins? Aren’t they fiat money? Aren’t they beyond governmental control? Shouldn’t they work OK as money?

All excellent questions. Let’s go one step at the time.

Strictly speaking, Bitcoins are not classified as money according to Libertarian principles, since they do not fulfill the Regression Theorem (as explained in our lesson Real Money For A Real Economy).

However, having said that, it is also true that the Regression Theorem can be enunciated in a slightly different (and more modern) manner. According to this theorem a commodity becomes money the first time somebody uses it as money. The fact that it can act as money is because it is a commodity first and therefore it has other uses which makes it desirable.

However, at the core of the Theorem is the question, why would anybody want something? If they want it, does it matter why? Of course it does not. Therefore, it is possible to say that Bitcoins had some other value before they became money. Maybe their value was curiosity or novelty or bragging rights or something else completely different. It does not matter. It had some other desirability before it became money…. sort of.

Bitcoins became money because somebody defined them as money. It is a fully fiat currency. However, before they became usable money, at the very beginning, their first adopters wanted them because of some other property. Therefore they do qualify for the modernized Regression Theorem. Although they were created as money, they had a “before”.

Bitcons act as a means of exchange. Are they perfect? Of course not. They are wildly volatile. So what? Everybody knows that when the market is scarce, volatility is high. As more people begin to use them, volatility drops. Volatility is not an indication that Bitcoins are not money.

How about acceptance? Bitcoins are not yet widely accepted. Does this means they are not money? Of course not. The acceptance of Gold and Silver did not happen overnight. It happened over thousands of years. Bitcoins are only a few years old! Let’s wait and see.

How about valuation? For money to be considered money, are things not supposed to be valued in money? Sure. Are there many things valuated in Bitcoins? No. Does this mean that Bitcoins are not money? No. This means that we need to give them time and see how do they evolve.

How about printing? Are Bitcoins being created all the time? Yes.. but.. all the time less and less Bitcoins are being generated. At some known point in the future, all generation will stop. This end point is not changeable. It is hard coded in the software. Furthermore, Bitcoins cannot be faked or printed on demand as politicians need to do. Bitcoins are not under the power or discretion of any politician. So, mild printing going towards no printing is not such a horrible thing after all.

Bitcoins and other cryptocurrency is in its infancy. We don’t know where it will led, but one thing is clear: they are money.

WHY NOT USE FIAT CURRENCY?

This question is posed all the time in many forums and discussion groups. It always end the same way: groups entrenching in their positions and not even agreeing to disagree.

It does not have to be this way. The truth is that fiat money works. Real money also works. Cryptocurrency works. Heck! Tea and sea shells and salt worked in the past as currencies. So then why are we adamant that only real money should be used?

Two simple reasons:

  1. It works better than anything else and this was historically proven in many occasions.
  2. It cannot be counterfeited by governments

Which leads us to the conclusion:

Real or commodity-based currencies are more stable over long periods of time than anything else. This is why we prefer them.

CONCLUSION

Free markets are simply the free exchange of goods and services among people. To make this exchange more efficient, money was invented. Money is nothing more that the means of exchange, this is, an intermediary between exchanges of goods and services.

Governments forced upon us fake money which is based on thin-air and fake reserves or as a famous slogan goes: on the “Full Faith And Credit” of a government.

It is this fake money that it is used in our economy, an economy that is becoming increasingly fake since it is addicted to fake money. Without this fake money and just like a drug addict, it would go into withdrawal. This would be very painful. However, in the end, it would be extremely beneficial for the patient. The only deaths we would see would be governments and politicians who would not survive the detoxification treatment. We are better off without them anyways. Much, much better off.

How you deal with this information is up to you know. Your choice, as usual.

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

 

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