I never understood the economy. All the obfuscated mumbo-jumbo lingo that you hear in the media is extremely confusing and explains nothing. At some point I thought that maybe I’m too dumb? But wait. After all, I was able to understand the formalities of Quantum Physics, Electrical Engineering, and much of Psychology. So why not the economy? The key to understanding is accurate and precise explanation. What I learned is mind-boggling: modern economy is based on a giant fraud scheme. It’s sad, but it explains what the hell is going on. I think you should understand it as well if you care about your well-being, wealth, and future.
Within the last six months I took the time to educate myself about the basics of Macroeconomics. I found these fantastic online lectures by Prof. K. Petrov. Here I would like to describe my understanding of one fundamental concept of modern banking system: inflation. Don’t worry. Actually it’s all extremely simple. It is also extremely evil.
Inflation. It simply means price increase across the entire economy. When you hear the news, you think that inflation is natural and that’s the way things are meant to be. But hey, do prices increase themselves??? Of course not. One of the ways to increase inflation is to increase money supply, the infamous money printing. This is not how things are meant to be! Please, do yourself a favor and watch a short episode of Duck Tales (that I absolutely loved as a kid):
So what is the lesson here? It’s the following: if you print money (and others don’t), you are the one who primarily benefits from it. Imagine yourself printing extra money. Got it? You can buy a new car, travel more, and get more financial freedom. What are the consequences? After a while the money supply on the market increases and prices go up. In other words: the money loses its value. Let’s say you’ve got $100 today, but someone doubles the money supply within one day. What happens? Tomorrow the actual value of your savings is only $50. You lost half of the hard-earned money. The entity that printed the money, however, already spent it and benefited from it.
Who prints money? In the real world central banks print money. They can print as much as they like. For example US Federal Reserve printed several TRILLIONS of $$$ in the last several years. If they print, it is called quantitative easing. If you print, you go to jail. Unfair, isn’t it? I’d say more. It’s immoral.
Why do they print money? Have you noticed that governments always spend more money than they have? Consequently, they need to somehow borrow more money. When you borrow money, however, you have to pay it back. But wait, how can you pay the loan back if you have no money? You can either take another loan or you can print more money! So this is what happens in practice. The government prints money. The government is the one who benefits from printing. Citizens, on the other hand, lose money. Are you cool with that?
How come they are allowed to print money? It is possible because modern currencies are fiat currencies. Their value comes from the law; they are not backed by any tangible commodity. Several decades ago currencies were backed by gold and silver. For example, you could always exchange US dollar for a fixed amount of gold ($1 = 1.505g of gold), and British pound for silver. That prevented the government from printing money, because they could not replicate precious metals. Fast forward to the year 2013; due to inflation dollar dramatically lost its value. If you had $100 at the beginning of the 20th century, now it would be worth only $4. If you have savings, what’s their value in 50 years when you retire?
Is there some way to defend yourself from getting ripped off by the government? Yes, there is. You can be smarter then the state. Get rid of all the paper money. If you have savings, invest them in something tangible, experience, or of real value. For example, you can invest in own education, traveling, a startup, stock market, precious metals, etc. In fact, for the last several thousands of years silver and gold were good stores of value. Unlike any kind of paper money issued by governments/central banks/banksters. If at the beginning of the 20th century you exchanged $100 for gold, you would get 150.5 grams of gold. Do you know how much it is worth these days? $5896. That’s a slightly better business than the $4. Isn’t it?
Disclaimer: although the article talked about US dollar, all the above applies to pretty much any other currency: British Pound, European Euro, Swiss Frank, Canadian Dollar, Swedish Krona, Polish Zloty, Japanese Yen, etc. Throughout the history the governments have been making the same mistakes over and over again. The future is predictable. In the end the paper currency is worth nothing.