The Curse of Fiat Money Creation

By Sarel J. Oberholster

The essence of all trade is barter. See blogpost “Why do governments hate gold as money?”. There are two types of money, “goods” money with an intrinsic value such as gold, or fiat money with no intrinsic value.

Goods money is internal to the economic system. Nobody can create new money unless they contribute to the economy by making that “good”. Again, the example of gold. Someone must mine and refine, with all the costs, investment, labor and whatever other resources required, to add new gold to the economy. It adds a physical good with an inherent value and economic purpose which you can touch and hold, to the economy. It adds to the collection of economic goods. Now, when you use it as money you barter a good for a good. Value for value.

Fiat money created by central banks is either worthless pieces of paper or worthless digital footprints. It comes into existence outside the economy and has no intrinsic value. It is a nothing and adds nothing to the collection of goods in the economy. Yet, the moment anybody uses it, that entity barters a nothing for a good. The first economic user to “spend” it barters a nothing for a good for an outright 100% win.

Trade, using money, in the economy is a chain reaction. The first use is fiat-for-good. The new holder of fiat had given away a good. Value for fiat. The first person exchanging a good for fiat allows the first user of the fiat to extract a good for free, in an exchange for a nothing, from the economy. Subsequent use of that fiat unit will not extract another good, but simply swap the nothing of the fiat to subsequent users in the chain. Like this:

1.      Central Bank uses Fiat A for Good A from person A.

2.      Person A uses Fiat A for Good B from person B.

3.      Same continuation to infinity.

The central bank with government in the background uses its “tools” to channel the fiat money into the economy and extract the “value-for-a-nothing” via this process. It is dealt with in detail in my book Central Bank Conmen.

The only entity which gets away with bartering a nothing for a good is the central bank. The population suffers a loss equal to that first transaction and person A then transfers that loss to the next person down the line who accepts that fiat A. That chain reaction will flow through the economy from A to B to C …to Z. These fiat losses are like tiny bubbles in the economy’s bloodstream. One day, and nobody knows when, those bubbles will collect in one place and give the economy cardiac arrest like 1929 or 2008. Yet, all these events just create another opportunity to pump even more air into the system.

The central bank gains wealth, 100% for free, for itself and government with every new unit of fiat they introduce into the economy. The central bank and government then redistribute that wealth as they see fit looking after themselves first. The economic population suffers that loss. Sadly, those most unable to counter this process will always be the economically ignorant, and the poorest of poor are usually the most economically ignorant. They will carry the bulk of this burden without even understanding their plight.

The few central banks who can distribute their fiat across international boundaries have the additional benefit of extracting goods for free from global populations. The holdings of currency reserves globally are indicative of which countries can extract free goods globally from other countries in exchange for a nothing fiat payment.

IMF Data https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4

The creation of new fiat money does not always create visible inflation. Human innovation and ingenuity create progress, and that progress means lower costs to produce goods and services. It is a relentless process but where are the lower prices? Fiat money creation takes it all.

I explain this phenomenon in my blogpost “Central Bank Conmen: Economic Robbers and Bankrupters of Empires”. It is further discussed, in more detail, in my book together with the consequences thereof.

The game of human progress.

This simplified example explains the effect of fiat money creation on a static sample economy.

Q: I have $100 in an economy and 100 equal products in that economy. What is the price per product.

A: $1

Q: Human innovation increases the products from 100 to 200 using the same resources. What will the price per product now be?

A: $0.50c

Q: How much did the population win through innovation?

A: $100. This is deflation.

Q: A Central Bank increases the money by $100. What will the price per product now be?

A: $1

Q: What did the Central Bank do?

A: They created "price stability" by removing the deflation from the economy. (Prices remained the same.)

Q: Who now took the $100 deflation?

A: The central bank.

Q: What does the central bank do with the $100?

A: Pay it to themselves, government, and their "friends".

But wait, there's more...

The central bank follows a policy of 2% inflation per annum. They spell it out. So, prices must increase by another 2%pa. Thus, the central bank must add another $4.

We now have $204 in the economy. The central bank has vested $104 upon itself and the price of a product is now $1.02 ($204/200 products = ) rather than $0.50c. Magic? Alchemy?

No, it is fiat money creation in action.

The infographic hereunder shows the process visually.

Innovation and progress give us more product for the same price. That is the essence of progress. Fiat money creation continually adds more fiat money to the money pool from outside the economy and robs us of representative value. Thus we must pay ever more for ever less product. That is the essence of inflation. Inflation does not start at the previous price level. It starts at the price level after human progress, after the deflation generated by human progress. The money creation and inflation from the progress price up to the previous price level is hidden from sight while central banks proclaim with pride that they are keeping inflation under control. The wolves are the shepherds of the sheep, eat all the lambs and keep the flock stable (well also sneak a sheep in here and there, wink-wink).

The central bank manages fiat money creation to harvest all human progress (innovation, ingenuity, productivity improvements, everything which improves efficiency and cost effectiveness) plus the policy target of another across the board inflation of at least 2%.

Most central banks harvest only from their own population but a few very privileged central banks can also harvest wealth from global populations.

The result is that a mountain of new produce is constantly matched by a mountain of new fiat money to keep prices even (price stability) plus 2%. That is the curse of fiat money creation.

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