“The closing of the gold-exchange window in 1971, relieved the U.S. government from the restraint of having to redeem its fiat in physical gold, and thus allowed it a larger margin of inflationary expansion. The inevitable result of the expansion in the quantity of money was price increases for goods and services - the hallmark of the world economy in the 1970s. As runaway inflation ensued, the U.S. government did what every inflationist government in history has done: it blamed it on a multitude of factors - the Arab oil embargo, evil speculators on the international capital markets, natural resources reaching their limits, etc. - but it never accepted the culpability of its own monetary policy”.
The Fiat Standard - Saifedean Ammous
The author summarises in one-single paragraph the root cause of the many problems we are facing today as a civilisation, and my motivation is to break this paragraph down and explain each of the concepts that the author has beautifully condensed here.
I consider it is of outmost importance to dedicate time into understanding these concepts, as it may be possible that we have started sliding through a phase change, a change in “the world order” as described by the successful investor Ray Dalio. It is possible that what we know and have lived since the recovery after the second world war and up until today, may not be what we, our children, and the children of our children will be living in the next decades to come.
I may sound catastrophic at first, but, one just have to realise that it is the first time since the recovery after the second world war that the U.S. government’s debt is larger relative to the yearly output of their economy.
This alone would be a dead end of an economy. Imagine a family of mother, father and two kids. The parents go to work everyday and earn their salary at the end of the month, but their poor planning, or lack of economic knowledge, or greed for spending on expensive unnecessary products, make them spend more money that they earn and start taking credit card loans to finance their deficit.
After several years, the loans add up to an amount where it is no longer possible that their salaries will be increased so much that they can catch-up with their debt. At this point in time, is game over, the only thing they can do is to carry on taking more credit card debt up to a point where the interest expenses are even larger than their monthly salaries, and at that time the only thing they are able to do is to tell the bank they cannot pay the debt back, they can only default on their debt obligations.
The result is that the family is devastated economically and their future salaries will be seized to pay off the outstanding loans with the bank. They wouldn’t be able to do anything else.
Well, the U.S. government debt had reached the point of no return many years ago, and it is common knowledge that the debt cannot and will not be paid back, so the next item they will be facing is the interest expense problem.
And how did they get here, may not be very easy to grasp at first, but the first we may need to think is that the U.S. government is a company that, in principle, should provide a service to their citizens, which is maintaining an organised structure that would benefit the citizens as a whole, which should be achieved by successfully managing the assets that the citizens provide every year in the form of taxation.
However the government started to get as big and as incompetent that have been spending more money than they could collect from taxes and investments for the past many decades, and as with that family that spent more than they earn, they have no option than slowly taking loans to pay off their deficits and pray for that the day when the interest expenses are larger than their income never comes.
The effect from the massive expansion of money supply perpetrated by banks and governments (government spending also increases the supply of money) since the great financial crisis and culminated during the COVID pandemic are getting entrenched into the economy in the form of rising prices of goods and services. Meanwhile their central bank - the Federal Reserve - is working to maintain - or recover - their credibility as their maxima is supposed to be maintain price stability, which they are failing to achieve.
To maintain price stability - do not confuse this con reducing prices to previous levels but simply to keep them from increasing out of control -, the Federal Reserve is attempting to destroy jobs and thus eliminating some of the wage pressure in the services sector, and to reduce spending by destroying your savings and thereby reducing demand. This is done via increasing interest rates, or what is the same, deciding on the price of money, on the cost of capital. The fastest increase in interest rates in the last many decades. However, this cost of capital also applies to the government, which as part of this debt is maturing and they need to roll debt onto more debt, their interest expense will suddenly explode, while their income is shrinking as the economy is suffering.
Well, and why we think we are at the edge of the cliff is because the U.S. government, and many governments across the western world such as many European countries and the United Kingdom, together with their central banks, are right now cornered with these two problems. One, a huge debt, and two, an entrenched and difficult to solve imbalance between supply and demand that is forcing the central banks to destroy the economy by keeping interest rates high.
Adding with an extra factor to spice this all up, the supply constraints in the basis of all production - the energy - caused by the poor investments of the last decades, plus the growth limit problem caused by the poor demographics.
The enormous debt the governments hold and the increasing interest expenses the debt comes with as interest rates are kept high by the central banks leaves them with no option that, if they do not want to default on their debt obligations, they will need to ask their central banks to lower interest rates and let prices of goods and services increase to the moon, or what is the same, let the money supply expand to the moon and thus, the currency held by their citizens be massively debased over the coming decades.
There may be other combination of options hidden into different “tools” the central bank could pull up, but unfortunately they end all bad for the citizens in the form of currency debasement and translated into increasing prices, and the majority of the citizens do not know about this, simply because you are incentivised to not know about this.
The only thing they show you is a measurement that has no meaning which is called “inflation” and that measures the relative price increase of a “typical basket of goods”. However, this basket of goods change as the currency gets debased and the better products are no longer affordable by the average person, or the products are getting shrunk into smaller pieces for the same price, a phenomenon that has been named “shrinkflation”.
Another thing they could show you is a centralised digital currency (a CBDC, the britcoin for example in the United Kingdom), which potentially has the power to magically keep inflation under control by controlling where you spend and not spend your well-earned money. They will use the systems they have tested during the COVID pandemic to introduce you a carbon credit into your smartphone, so they can control the prices of many different products by limiting you from acquiring as many products as you want, or driving wherever you need.
Many different tricks they will be pulling up to keep running the show and let you believe they act in your best interest, keeping you distracted with dealing with your everyday life, fighting about politics and watching endless hours of rubbish on television. They won’t educate you or your children to know how the system really works, because if you knew, you would fight against their interest to change it.
Well, you don’t even know what money is, do you? You have never been explained that what is the basis of our civilisation, that thing that allows us to trade our precious time for this product that buys us food and clothes to survive. Well, the reason why you were not explained this in school is because it is better for them that you don’t know, so they can carry on with the show.
Politics has become one of the biggest problems of our civilisation because we are so ignorants that we do not demand that these leaders need to be responsible and not spend more than they are provided for by their citizens, that they are not this greedy family that takes on more credit card debt to finance their luxuries.
After reading this you should now know a couple of more things. One, that the western world is at the edge of a cliff never experienced since the recovery after the second world war. Second, that at the end of the cliff there’s only one possible outcome, which is massive debasement of the currency, which is only suffered by the citizens in the form of out of control price increases.
However, there is hope for the citizens. Luckily, the world has given us a new form of money that is not controlled by any government or central bank and thus cannot be debased, that is transparent and does not need you to trust anyone to own it, or that you could own anonymously. A new form of money that was silently introduced and has now spread all over the world being impossible to eliminate, that is helping first those countries where people suffer from massive constant debasement of their currencies, or from governments, or even family members that do not allow their people to have any private property.
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Unsorted thoughts from a random bitcoiner
