Fiat Money VS Sound Money - Is Bitcoin The Solution To Our Current Problems?

With the current situation a long ongoing debate came across my mind again: Why are we not having sound money? Why are we relying on this fiat money that everybody seems to hate? In this article I want to talk about what happened in 1971, why it is important to our situation nowadays and also debate the question: Hard Sound Money vs Soft Fiat Money.

1971: Beginning Of Our Current Problems

Let’s start with the good old days! A few year back the average salary of a person was around 10,500 USD while a home was costing around 15,000 USD. The average rent was approximately 150 USD a month and the average college was costing students around 2,600 USD per year. These expenses compared to the average salary had a pretty good ratio in my opinion compared to today. In today’s society the average person is earning around 44,000 USD per year which is an increase but the expenses are very much higher! The average home is costing around 420,000 USD, the average rent is around 1,700 USD per month and the college fees are at an overwhelming 54,000 USD a year! This seems very much insane! It looks like the productivity increased by a lot but the average compensation stayed very low.

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This brings up the question: What the hell happened and what changed? It all began in 1933 when the executive order 6102 was signed which forbid everybody to own gold in the United States. Looking back this was a horrible order but I guess it were very desperate times back then. After the second World War a lot of countries came to an agreement to exchange their native gold backed currencies against the US Dollar which then can be traded against gold. This made the US Dollar the world reserve currency and at the same time the US very powerful!

This whole process worked great until 1971. Before this time point the US Dollar was pegged to gold which made it more or less a sound money. The problem with sound money is that it has a fixed supply. Because the US Dollar was needed around the world and the US gave a lot of loans out the needed money was missing in the US itself. Not only that but internal and geopolitical problems led the US into very hard times. This situation forced former president Nixon to de-peg the US Dollar from gold which changed the system and the value of the dollar!

This change made the US Dollar push towards a Fiat-Currency and not a commodity based one. The problem with that is that Fiat money is ruled by decree. The only think that is truly backing this kind of money is the believe in the system by the people who are using it. Central banks are now having the power to print more money and have more control overall. This also leads to inflation but we will come to that a little later.

Why Not Go Back To Sound Money?

We all know where this got us: Record-High Inflation of over 8%! The true purchasing power of our money is getting lower by the minute and this all thanks to the excessive money printing of the FED. But why not just go back to a hard sound money system? This is one of the biggest and oldest debate in the economics field. On the one side we have the currently unliked fiat money that just seems like toilet paper right now, on the other side we have this valuable and appreciating currency of exchange that seems to solve all of our problems. But is this really the case?

Gold and Crypto enthusiastic people (which I count myself as well), would definitely say YES! In the end government controlled money brings a lot of downsides and it should always be the aim to have a decentralized system, right? The thing is, in theory this idea of this hard and sound money seems very tempting but economist would debate that an inflation rate of 2-3% is needed!

What would happen if our money would be locked at 0% inflation. In theory our money would gain value because technology is evolving and the cost and effort for producing certain goods should get lower. This would even mean that the system would have deflation and that money is getting more valuable by the minute. The issue with this dream is that everybody in their right mind would stop buying things! They would change to a more long term approach and buy things like a TV or a car later, because their money would be worth more by then. This would lead to a collapse of the economy as there would be no sales anymore.

Without sales there would be no more companies that would be willing to produce goods and in the long term there would be no development, no innovation, no progress. The human race would come to a stand still and there would be no incentive to develop ourselves further! Another big issue would be: As the world population gets larger, the new people will need money. If nobody is willing to spend their money, the “new” people on this world will not be able to get any money which is also a great problem. Last but not least, what will happen in a humanitarian crisis event. Let’s say something like a pandemic! Wouldn’t you hope that your government would help you out by giving you some free money?

The thing is: The fiat approach like I described it above is certainly not perfect either. We saw it play out: Too much money got printed. A lot of people got too greedy and we are suddenly in a state of too much printed money. In the end mistakes are human and that is what happened. The money printer was on for a little too hard for a little too long. This means that we now have too pay for this mistake which will probably lead us into a recession as the FED tries to collect their printed money back and reduce the supply. The real goal really is to find the right balance in order to maintain this sweetspot of innovation and growth.

Conclusion

To answer the question: Sound Money or Fiat Money? It is not an easy one! Both have their advantages and certainly their drawbacks and both of them are not perfect at all. It all depends on the problem that people want to solve. Bitcoin and Crypto will certainly help us to democratize money again and this is what humanity is craving right now as banks and big institutions showed that their greed is endless. On the other hand fiat money will see its use case again when more innovation and economy growth is needed.

Published by ga38jem on
Steemit
On 21st May 2022