What is inflation?
Most people think they know what inflation is, but they’re actually confused. Ask yourself right now to see if you know the answer.
What came to mind? Was it price increases?
If yes, then you’re confused like most of the general public. The increase in consumer pricing is a symptom of inflation, not inflation.
Inflation is when the money supply increases. There’s more money chasing fewer goods and services. This causes prices to act like a sponge and absorb more of the money circulating in the system. Prices increase for multiple reasons. There’s more money to be made by vendors, therefore they increase their prices to capture the additional money added to the supply. But mostly pricing has to increase because vendors have to a make a choice. Their costs to produce their goods and services just went up so therefore in order to maintain margin, they can either - increase the price of their goods or devalue their offering by using less expensive materials to produce their offering or they don’t make any changes and they lose margin.
Another way to interpret this phenomenon is the devaluation of money. Your money is worth less tomorrow than it is today. Your money buys fewer goods and services tomorrow than it does today. Essentially you need more money to maintain a specific lifestyle. This is your buying power. Holders of this inflationary money have to make a choice. They either save the money and hope inflation stops, they spend the money because it buys more now than it does tomorrow, or they invest that money into financial assets, real estate, and other scarce assets like gold and bitcoin. These riskier instruments will help retain the value of your wealth, rather than lose buying power by saving the inflationary money. However, this adds a layer of complexity for the users and holders of that money as it requires participants to understand markets and how to be an educated investor. This process is both hard and time consuming. The average person doesn’t have the time to learn how to be an investor, nor should they have to.
In order for something to be considered money it must contain three important properties. It must be a median of exchange. It must be used a unit of account. And, it must be able to store value over time. So, if inflation causes our money to lose value over time, then why are we aiming for a 2% inflation target and what’s up with our money? Shouldn’t we be using a money that stores value over time. Encourages savings. And, causes prices to ultimately decrease. Isn’t that the point of capitalism and having free and open markets? Technically speaking, as we improve technology and become more efficient and productive, the cost of goods and services should go down. Technology is deflationary. The iPhone is a great example. We no longer need to buy a computer, a camera, a calculator, a flashlight, a TV, a newspaper, a GPS or a home phone. Everything is included in your iPhone. Technology acts like gravity and puts a natural force on prices causing them to decrease over time. Rather than embrace this technological force, our current financial system and monetary policy push against human ingenuity in its efforts to drive inflation and keep the system alive.
In our current financial system we use fiat money. Fiat is currency established as money, often by government regulation. It holds no intrinsic value outside of being used to pay taxes. Fiat is a technology for money. It was first used to help facilitate trade by being a better unit of account and being more portable. When the world was on the gold standard, fiat was supported by gold and could be converted to physical gold. However, the fiat technological characteristics have changed over the years. It is no longer backed by gold and is being created at an alarming rate. It is primarily being used to pay for and denominate debt, particularly government debt. Today, many governments have 0% interest rates and the cost of borrowing money is heading into negative territory. This begs the question, what is the value of money? Especially, when it’s only being created to pay for debt and its creation is actually accelerating. I don’t have the answer, but one can speculate that we’re in a currency crisis and possibly the end game for fiat money. In particular, the end of the U.S. Dollar which represents 80% of all global transactions.
Coming full circle to understanding inflation, one can say inflation is a necessary tool or mechanism for our debt based monetary system. In other words, our current money is inherently inflationary currency that causes the value of that currency to decline over time and the prices of goods and services to increase as a result of an increased money supply. What’s the opposite of this?
Enter bitcoin
Gold has historically been the best way to opt out of the financial system in order to preserve wealth. However, technology has improved money itself and created an inflation hedge in bitcoin. Bitcoin is a savings technology, a technology for disrupting money. Technology is deflationary and so is bitcoin. With the invention of absolute scarcity (there will only be 21 million bitcoin ever) and bitcoin’s deflationary monetary policy (there will be less bitcoin created tomorrow vs today) bitcoin causes prices to decrease against the value of bitcoin. These specific properties are particularly timely when considering the health of current financial system. Last week, the Federal Reserve Chairman Jerome Powell indicated that the central bank will be increasing the money supply to overshoot their historical 2% inflation target. This is a dangerous game of chicken with the world reserve currency. Ultimately money is a belief system and by printing new currency out of thin air to keep the system alive can only work for so long. People will have to make a choice. Stay in the inflationary currency causing prices to rise or opt out for the deflationary currency bitcoin causing prices to fall.
What will you choose?
Below is a video detailing how our financial system works. Please excuse the conspiracy theory overtones. The main point for sharing this video is to spread awareness to the actual mechanics of how our financial system works. The system is purposely complex and extremely confusing. I recommend watching the video multiple times to fully grasp what’s actually happening here.
Cheers,
Verks
***This is not financial advice. Investing in bitcoin and cryptocurrency is extremely risky. Please do your own research. The ideas and news presented in this newsletter are my personal opinions and meant for informational and entertainment purposes only.