All fiat currencies will eventually disappear, but before their demise, they always serve a hidden purpose: transferring wealth from value creators to political insiders.
Written by: Knut Svanholm
Translated by: AididiaoJP, Foresight News
Currency is the core of the market, facilitating trade and economic accounting. Its value, or purchasing power, is eroded by inflation, which benefits the wealthy while sacrificing the interests of savers.
Nothing is more important for the operation of a free market than currency. Currency constitutes every transaction, representing the embodiment of all value in the exchange of goods and services. But what is the price of currency?
The goods with the highest market liquidity often become society's preferred medium of exchange, i.e., currency. Prices denominated in this universal medium make economic accounting easier, allowing entrepreneurs to discover opportunities, gain profits, and drive the progress of civilization.
We understand how supply and demand determine the prices of goods, but determining the price of currency is more complex. Our dilemma lies in the fact that since prices are expressed in currency, we lack a unit of account to measure the price of currency itself. Since we cannot explain it in monetary terms, we must seek other ways to express the purchasing power of currency.
People buy and sell currency (exchanging goods and services for currency) based on their expectations of that currency's future purchasing power. As we know, individuals always make choices at the margin, leading to the law of diminishing marginal utility. In other words, all actions stem from value judgments, and actors choose between their most urgent goals and their suboptimal desires. The law of diminishing marginal utility applies here as well: the more of a certain good a person possesses, the weaker the satisfaction derived from each additional unit.
Currency is no exception. Its value lies in the additional satisfaction it can provide, whether for purchasing food, security, or future choices. When people exchange labor for currency, the only reason is that they value the purchasing power of currency more than the immediate use of their time. Therefore, the cost of exchanging currency is the highest utility that an individual gives up by not holding cash. If someone works an hour to exchange for a ribeye steak, they must believe that the value of that meal exceeds the value of one hour of leisure.
The law of diminishing marginal utility indicates that the satisfaction derived from each additional unit of a homogeneous good decreases progressively, and thus the individual's valuation of the additional unit also diminishes. However, the definition of "homogeneous goods" entirely depends on the individual. Since value is subjective, the utility of each additional unit of currency depends on personal goals. For someone who only wants to buy hot dogs, "one unit of currency" is equivalent to the price of one hot dog. Only when they have enough cash to buy the next hot dog do they consider that they have increased the unit of this homogeneous good designated for buying hot dogs.
This is precisely why Robinson Crusoe, faced with a pile of gold, regarded it as worthless; gold could not be exchanged for food, tools, or shelter. Currency in isolation is meaningless. Like all languages, it requires at least two participants to function; currency is essentially a tool for communication.
The Illusion of Inflation and Idle Currency
People choose to save, consume, or invest based on their time preferences and expectations of the future value of currency. If they expect purchasing power to rise, they will save; if they expect it to fall, they will consume. Investors make similar judgments, often shifting funds to assets they believe can outpace inflation. But whether saving or investing, currency always serves its holders. Even "waiting funds" have a clear mission: to reduce uncertainty. Those who hold cash without spending are fulfilling their desire for flexibility and security.
Thus, the concept of "currency in circulation" is misleading. Currency does not flow like a river; it is always held, owned, and utilized by someone. Exchange is action, and action occurs at specific points in time. Therefore, there is no such thing as "idle currency" in the world.
If currency loses its connection to historical prices, it will lose its anchor, and personal economic accounting will become impossible. If a loaf of bread cost $1 last year and rises to $1.10 this year, we can infer the direction of change in purchasing power. Long-term accumulation of such observations forms the basis of economic expectations. The CPI (Consumer Price Index) provided by the government is the official version of such analysis.
This index attempts to reflect the "inflation rate" through a fixed basket of goods but deliberately ignores high-value assets like real estate, stocks, and art. Why? Because including them would reveal the truth that those in power strive to conceal: the pervasiveness of inflation far exceeds what they acknowledge. Measuring inflation through the CPI essentially obscures an obvious truth: price increases will ultimately be proportional to the expansion of the money supply. The creation of new currency will always lead to a decline in its purchasing power relative to what it could have been.
Price increases are not caused by greedy producers or supply chain failures; their root cause is ultimately monetary expansion, which leads to a decrease in purchasing power. The groups closest to the source of currency (banks, asset holders, and politically connected enterprises) benefit, while the poor and working class bear the brunt of rising prices.
This impact is lagging and difficult to trace directly, which is why inflation is often referred to as the most insidious form of theft. It destroys savings, exacerbates inequality, and amplifies financial turmoil. Ironically, even the wealthy fare better under a sound monetary system. In the long run, inflation harms everyone, including those who seem to benefit in the short term.
The Origin of Currency
If the value of currency derives from its purchasing power, and that value is always judged against historical prices, how did currency initially acquire value? To answer this question, we must trace back to a barter economy.
Goods that evolve into currency must have non-monetary value before becoming currency. Their purchasing power must initially be determined by demand for other uses. When they begin to serve a second function (as a medium of exchange), demand and price rise in tandem. This good then provides its holder with dual value: utility and the function of a medium of exchange. Over time, the latter's demand often surpasses the former.
This is the essence of Mises' regression theorem, which explains how currency arises from the market and remains connected to historical valuations. Currency is not a state invention but a spontaneous product of voluntary trade.
Gold became currency because it meets the standards of good money: durability, divisibility, recognizability, portability, and scarcity. Its uses in jewelry and industry still confer it with utility. For centuries, paper money was merely a redeemable certificate for gold. Lightweight paper currency perfectly solved the transportation problem of gold. Unfortunately, the issuers of these certificates soon discovered they could overissue paper money, a practice that continues to this day.
When the link between paper money and gold was completely severed, governments and central banks were able to create money out of thin air, forming today's unanchored fiat currency system. Under the fiat currency regime, politically connected banks can be rescued even in bankruptcy, leading to moral hazard, distorted risk signals, and systemic instability, all achieved through the silent plunder of savings via inflation.
The temporal connection between currency and historical prices is crucial for market processes. Without it, personal economic accounting would be impossible. The aforementioned regression theorem of currency is a behavioral insight often overlooked in discussions about currency. It proves that currency is not a bureaucratic illusion but is genuinely connected to the primal desire for "means of exchange for specific purposes" in a free market.
Currency is a product of voluntary exchange, not a political invention, collective illusion, or social contract. Any good with limited supply that meets the basic requirements of a medium of exchange can become currency. Items that possess durability, portability, divisibility, uniformity, and widespread acceptability can all serve as currency.
Suppose the "Mona Lisa" could be infinitely divided; its fragments could become currency, provided there is an easy way to verify their authenticity. Speaking of the "Mona Lisa," anecdotes about famous 20th-century artists perfectly illustrate how an increase in the supply of a currency good affects its perceived value. These artists realized they could leverage their celebrity status to become wealthy through signatures. They discovered that signatures themselves held value, even being used to pay for meals. It is said that Salvador Dalí once signed a wrecked car, instantly turning it into a valuable artwork. However, as the number of signed bills, posters, and car wrecks increased, the value of each additional signature continuously diminished, exemplifying the law of diminishing marginal utility. An increase in quantity leads to a devaluation of quality.
The World's Largest Ponzi Scheme
Fiat currency follows the same logic. An increase in the money supply dilutes the value of existing units. Early recipients of new currency benefit, while others suffer. Inflation is not just a technical issue; it is a moral issue. It distorts economic accounting, rewards debt rather than savings, and plunders the most defenseless groups. In this regard, fiat currency can be considered the world's largest Ponzi scheme, nourishing the top at the expense of the bottom.
We accept defective currency only because it has been inherited, not because it is optimal. But when enough people realize that sound currency (currency that cannot be counterfeited) is more beneficial for the market and humanity, we may stop accepting false gold certificates that cannot sustain us and instead build a world of real, honest, and merit-based value.
Sound currency arises from voluntary choice, not political decree. Any item that meets the basic requirements of currency can serve as currency, but only sound currency can allow civilization to prosper in the long term. Currency is not just an economic tool; it is a moral institution. When currency is eroded, everything downstream—savings, price signals, incentive mechanisms, and trust—is distorted. When currency is honest and trustworthy, the market can coordinate production, signal scarcity, reward frugality, and protect the vulnerable.
Ultimately, currency is not just a means of exchange; it is a guardian of time, a record of trust, and the most universal language of human cooperation. Eroding currency destroys not only the economy but civilization itself.
"Human beings are shortsighted creatures, only able to see the immediate few inches before them. Just as passion is no friend to reason, specific emotions often lead to wicked schemes."
Counterfeiting: The Modern Currency and Fiat Illusion
We delve into the operational mechanisms of modern currency. You may have heard of negative interest rates and wondered how they coexist with the fundamental principle that "time preference is always positive." Perhaps you have also noticed rising prices of consumer goods, while the media points fingers at everything except monetary expansion.
The truth about modern currency is hard to accept because once the scale of the problem is recognized, the outlook appears bleak. Humanity struggles to restrain the impulse to exploit others through money printing. The only apparent solution seems to be to exclude humanity from this process or at least achieve a separation of currency from state power. Nobel laureate Friedrich Hayek believed this could only be accomplished through "some sort of roundabout clever means."
Britain was the first country to weaken the connection between its currency and gold. Before World War I, almost all currencies were redeemable for gold, a standard that had developed over thousands of years, stemming from gold being the most liquid commodity on Earth. However, by 1971, when U.S. President Richard Nixon announced the "temporary suspension of the dollar's convertibility into gold" and unilaterally severed the last link between the two, convertibility was completely abandoned. His move was to fund the Vietnam War and maintain political power.
We need not detail all aspects of fiat currency, but the key point is that the currency issued by today's states has no physical backing and is created entirely as debt. Fiat currency masquerades as money, but unlike true currency (which arises from voluntary exchange), it is a tool of debt and control.
Every new dollar, euro, or yuan is born from loans issued by large banks. This money must be repaid with both principal and interest. Since interest is never created in sync with the principal, the circulating currency is always insufficient to repay all debts. In fact, the system's survival requires more debt. Modern central banks also manipulate the money supply through bailouts (preventing inefficient banks from failing) and quantitative easing (pouring fuel on the fire).
Quantitative easing is the act of central banks creating new money to purchase government bonds, essentially exchanging promissory notes for newly printed cash. Bonds are promises from the government to repay borrowed money with interest, backed by the state's right to tax current and future citizens. The result is a continuous and covert extraction of wealth from producers through inflation and debt enslavement.
Currency printing continues under the banner of Keynesian economics, which supports the majority of modern government policies. Keynesians claim that spending drives the economy forward, and if the private sector stops spending, the government must step in. They assert that every dollar spent creates a dollar's worth of value for the economy, ignoring the reality of value dilution caused by inflation. This is merely a rehash of Bastiat's "broken window fallacy." Increasing the number of zeros does not create any value.
If printing money could truly increase wealth, we would all have a super yacht by now. Wealth comes from production, planning, and voluntary exchange, not from the numerical games on a central bank's balance sheet. Real progress comes from people accumulating capital, delaying gratification, investing in the future, and exchanging with others and their future selves.
The Ultimate Fate of Fiat Currency
Increasing the money supply does not accelerate market processes; rather, it distorts and hinders them. The literal meaning of "slow and foolish" follows. The continuous decline in purchasing power makes economic accounting more difficult and long-term planning slower.
All fiat currencies will eventually disappear. Some are destroyed by hyperinflation, some are abandoned or absorbed into larger systems (such as the currencies of small countries being replaced by the euro). But before their demise, fiat currencies always serve a hidden purpose: transferring wealth from value creators to political insiders.
This is the essence of the "Cantillon Effect" proposed by 18th-century economist Richard Cantillon. When new currency enters the economy, the earliest recipients benefit the most, as they can shop before prices rise. Meanwhile, the groups furthest from the source of currency (ordinary wage earners and savers) bear the costs. In a fiat currency system, the cost of poverty is extremely high.
Despite this, politicians, central bank governors, and mainstream economists still insist that "moderate" inflation is necessary. They should be more clear-headed. Inflation does not foster prosperity; at best, it redistributes purchasing power, and at worst, it erodes the foundations of civilization by destroying trust in currency, savings, and cooperation. The abundance of cheap goods in today's world is achieved by overcoming the barriers of taxation, borders, inflation, and bureaucracy, not because these barriers exist.
Behavioral Economics
When left unimpeded, market processes naturally tend to provide better goods at lower prices for more people; this is true progress. Interestingly, behavioral economics is not only a critical tool but also a cognitive framework. Many people become cynical after seeing the deep flaws in the system, but behavioral economics offers a clear perspective: it helps you understand that producers are the true drivers of human prosperity, not the government. Once you grasp this, even the most mundane labor is imbued with deeper meaning. Supermarket cashiers, cleaners, and taxi drivers all participate in a system that meets human needs through voluntary cooperation and value creation. They are civilization itself.
The market produces goods, while the government often produces "negative goods." The competition among businesses to serve customers is the engine of innovation, while the competition among political parties for control of the state rewards political maneuvering rather than talent. In the market, the fittest survive; in politics, bad money drives out good.
Behavioral economics helps you understand human motivations. It teaches you to look at actions rather than words and encourages you to think about the parallel realities that might exist: the unseen world erased by intervention.
Fear, Uncertainty, and Doubt
Human psychology is inherently biased toward fear. We evolved to respond to threats to survival rather than to appreciate beauty. Therefore, alarmist rhetoric spreads faster than optimism. The solutions proposed for any "crisis" (whether terrorism, pandemics, or climate change) are always the same: increase political control.
Researchers of human behavior are well aware of this. For every individual action, the purpose can always justify the means. The problem is that power seekers do the same. They exchange freedom for security, but history shows that fear-driven transactions rarely yield good outcomes. Understanding these dynamics makes the world clearer, and the noise gradually fades.
You turn off the television, reclaim your time, and realize that accumulating capital and freeing time is not a selfish act but a foundation for helping others. Investing in your skills, saving, and building relationships can expand well-being for everyone. You participate in the division of labor, create value, and do so entirely voluntarily. In a broken system, the most radical action is to build better alternatives outside of it.
Every time you use fiat currency, you are paying the issuer with your time. If you can completely avoid using it, you contribute to building a world with less theft and fraud. This may not be easy, but worthwhile pursuits have always been so.
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