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Home , Fiat money

1.5.5. FIAT 1 / 4 - Before I start bashing on current , do realise that the system has had some benefits as well. More importantly: do realise that most of those benefits are not available for a very large of earth’s population. More than 90% doesn’t have full access to a good working monetary system surrounding them, including loaning, insurance etc. So they don’t have the same access as I have as a Western citizen (and remember: neither do all Western citizens have access!).

The money in our current monetary system is called fiat money. As you’ve already learned is fiat money based on trust. And you also know that it consist of two different kinds of money, partially backed debt based money from commercial banks and public money, better known as , backed by a central non-commercial / public bank. But both denominated in the same name (for example “$” or “€”). This trust is often enforced by law, imposed by rulers or other entities that hold power. For example did the legislators allow for commercial banks to “print” money (of course not actually printed, but recorded in their ledgers). So our money isn't created by the government, despite common believe, but by other centralised entities. Mainly commercial banks and partly centralised banks. Key note: the same three risks of centralised ledgers (dishonesty, loss of record, exclusion) are applicable to our current centralized monetary system. Often we witness for example dishonest behaviour, like huge scale money laundering by entities with banking licenses. Loss of records: just think about the many hacks (and the closed off environments, the “operating behind the scenes”). But also exclusion of course, like mentioned: at least 2 billion people don't have access to a bank account, because they don't have the proper "KYC credentials". Or they don't have money to pay for the fees etc. Keep in mind that these 2.7 billion people are only “the head of household”, so for some reason children, females or elderly are not even taken into account of this count of the unbanked.

Even if by now you still don’t think this affects you personally, the next examples or sources might show you the importance of the above, even for you. Not only is the monetary system itself unsustainable (exponential increase of money), currently slowly being confirmed by even banks their-selves (see source further readings from German Bank). Because “money” is the institutions, the story, that almost everybody believes it has a huge impact on the different layers in society. One of the easiest examples are the ones you can actually see for yourself, like in the increasing of stocks or house prices. For example here in the , the house prices in Amsterdam rose at 300-400% since 2002. Even my own house nearly doubled in value in 3 years, (Okay, I exaggerate, it "only" went up +55%). Because of inflation, it’s a natural design of the system for prices to rise over time. But the issue here is that home values are outpacing inflation https://www.cnbc.com/2017/06/23/how-much-housing-prices-have-risen- since-1940.html , making it nearly impossible for new and young buyers to enter the . Insane amounts of course, but a logical outcome if you keep creating money and pump it in the economy. So luxurious goods become more expensive, but one of the things that doesn't rise exponentially are the salaries of people, creating a more and more increasing wedge to those that own assets and those that don’t. Which makes this system difficult to maintain... A good read on this topic is the book ‘Capital’ from Thomas Piketty https://www.amazon.co.uk/Capital-Twenty-First-Century-Thomas- Piketty/dp/067443000X?SubscriptionId=AKIAILSHYYTFIVPWUY6Q&tag=duckdu ckgo-brave-uk- 21&linkCode=xm2&camp=2025&creative=165953&creativeASIN=067443000X, we will post the link in the further readings.

So in this session we will discuss examples of problems that centralised ledgers cause or might cause, regarding our monetary system. We do this session, not only because we from KOIOS originate from a financial background, but also because world’s first public ledger (Bitcoin) aims to tackle these problems. So before diving into the world of the new ledgers, you should understand a bit more of the current world so that you can relate and understand some of the proposed solutions these aim to offer. In this case we selected four different topics where like Bitcoin offer alternatives from. We tried to depict these topics as neutral as possible, but remember that this is written by somebody with a high affiliation with cryptocurrencies so stay sharp and critical (and let us know any deficiencies in our story).

The four topics (outcomes of centralised ledgers where decentralised offer other alternatives): 1. Inflation 2. Bank runs 3. Errors 4. Cashless society.

So the first one up is inflation and hyper-inflation. Whether inflation is good or bad is all up to the experts, of which we will interview several. Also see the different sources in the slides if you want to learn more about benefits and downsides of inflation. Just remember for now that one of the main reasons for inflation is that authorities managing the inflation wants consumers to keep purchasing to grow economies. Because the value of your money drops each year, depending on your region with 1 to 5%, you money gets less and less valuable. Although this might not seem much on one year basis, imagine the impact on a larger time scale. For example the impact on your pension or when your saving up for something (or paying back for your mortgage). Currently (beginning 2020) the inflation rate is dropping, displaying the drop in spending, raising fears of a sharp economic slowdown. Normally you would get compensated for the inflation of your money with interest %, but with current day's negative interest, your money devaluates twice as fast. This is beneficial if you have debts, not so much if you save money. Some people therefore call inflation, “just another form of ”.

Whether inflation is the way to steer an economy, or whether a never ending continuous growth of economy is even possible and desired / sustainable healthy way for this planet remains outside the scope of this session (more about that later in other courses!).

So fiat is not limited in supply and therefore not a very good . It is not a good store of value because you lose your . Store of value in short = will it keep or improve my purchasing power over time. So an alternative for storing / protecting your purchase power is buying assets like houses or other commodities that can’t be “printed”, like or bitcoin. An overview of per country over the years can be found here. BC-1.5.5 Example 1 of centralised risks: (hyper-)inflation of fiat

1. 1971 The

Source

2. What is “Quantative Easing”?

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3. Examples

What could go wrong, when you talk about unlimited supplies of money, is the risk of “hyperinflation”. In short = money is growing from trees. Not physical trees, but ledger trees (anno 2020). For example this note of 50.000 Indonesian Rupiah already experiences some . Large denotations are often a sign of a instable or a currency that has been instable in the past. So what is the problem here with hyperinflation? Imagine you worked hard your entire life and you eventually managed to save up to 100.000 Rupiah's. Where 1 rupiah could buy you one bread (= purchase power). All of sudden somebody thinks: "well, hey...let's get rid of the 10 Rupiah note". This for example quite recently happened in a huge country like India, where all of a sudden the 20 rupee note were not "valid" anymore (2014. So Indian Rupees, not Indonesian Rupiahs ). This led of course to huge inflation and devaluation of their currency. All of a sudden your life savings where worth way less than a week before. In other words: you couldn't transfer your time from the past to the future, you couldn't hold down on your Store of Value (SoV). How to save up “money” in those scenario’s? Buying assets like houses isn’t an available option for those that cannot afford it, so they are often struck hardest (once again, see Piketty as well).

You often see a lot of different causes for hyperinflation, but keep on pumping money, in Europe's case called "Quantitative Easing", in an economy, might not be a very good idea in the long run. I've added an interesting picture of Germany after World War 2, where children are playing with huge amounts of money. The money was eventually worthless. So if the trust drops in the money, so does the value. To attack a currency, attack the trust that people have in that currency (attack the story!). It is one of the most efficient ways to get a currency down. Especially if it "runs on nothing", has nothing to back it or no other use cases.

Conclusion Our current monetary system isn’t flawless. It has a very high percentage of unbanked (people without access to the system) and also runs on the philosophy of inflation. Inflation means that your money loses in purchasing power, so you can buy less with your money each future period. Inflation is invented to motivate people to consume, to grow the economy, and is often felt hardest by those that can’t protect themselves against it. So an alternative for storing / protecting your purchase power is buying assets like houses or other commodities that can’t be “printed”, like gold or bitcoin.

We also discusses hyperinflation, where money is being circulated in to much abundance and people lose their trust in the institution, resulting in tremendous loss of purchasing power of the money.

Further Readings: - What is inflation? https://www.youtube.com/watch?v=beAvFHP4wDI - What is hyperinflation? https://www.youtube.com/watch?v=o- PNlhhVhZ8 - Picture bubble in slide: https://www.humbletraders.com/inflation/ - When is inflation good for the economy? https://www.investopedia.com/ask/answers/111414/how-can- inflation-be-good-economy.asp - What is inflation + 10 Strategies to combat inflation effects on your retirement https://www.moneycrashers.com/what-is-inflation-definition- causes-inflation-rate/ - Overview money supply https://en.wikipedia.org/wiki/Money_supply - What is quantitative easing? https://www.youtube.com/watch?v=4TihoBfdCe8 - QE picture: https://www.gold-eagle.com/article/us-currency- circulation-us-gold-reserves - Why are house prices so high? https://www.youtube.com/watch?v=Y4WmDoYJhnk - Picture purchase power in slide: https://www.gold- eagle.com/article/crashing-us-dollar-vs-gold-part-2