An Honest Account of Fiat Money (2018)
Discussions about Bitcoin should start by acknowledging both the good and bad of the fiat system.
While fiat money has led to a lot of abuse - hyperinflation, seizures, capital controls - the absence of all controls brings its own problems.
Benefits of Fiat Money
welfare: allows financing of large social projects by printing more money
anticrime: can demonetize/freeze assets easily
kickstart/smoothen: can manage fiat liquidity to kickstart economy/smoothen business cycles
stability: can keep the currency stable to increase its usability in the economy
international trade competitiveness: can devalue currency to boost export competitiveness
Implicit Tax
Governments create more money than they destroy, leading to inflation. It is an implicit tax on all holders.
Governments can use inflation to tax the shadow economy where tax compliance is low but also hurts the good economy and promotes terrible incentives.
Inevitability
Hidden taxation through inflation is also an advantage in war.
A country that taxes a lot through printing massive amounts will collect more money than one that only taxes through income. Said country can allocate more to military purposes and win a war against the other country.
The game theory of a world-wide sound-money standard is unstable - once one player abandons it, it incentivizes others to do so as well.
Similar dynamic was the rise of the nation-state itself – it proved stronger than the feudal state due to having larger national armies, and that forced feudal states to turn nation-states too.
Fundamental Fiat Problems
In our current system, money creation and money destruction is mainly done through private banks. New money is created when these banks create credit, and through fractional-reserve banking they only keep a small fraction of deposits in reserves.
The financial system then becomes hopelessly intertwined - if too many borrowers default on their loans, the entire system will fail – even for customers who never agreed to have their deposits invested in risky schemes.
This intertwining creates terrible incentives through a severe disconnect between risk and reward for the financial sector.
The government becomes obliged to bail out banks once they get into trouble from risky lending, which drives banks to take even more risk knowing that their potential losses are capped, but their upside is not.
A New Conversation
Bitcoiners are driven by a collective interest in exploring how to evolve money for a better society and make the global financial system more stable and distributed. They can’t fix the holes in the current system because of powerful incumbents who have a strong interest in preserving the status quo, so they compete.
But not in a hostile takeover attempt. Bitcoin’s purpose is not to destroy but rather to offer us freedom and choice, and in doing so - spark a conversation about the nature of money and its crucial role in our society.
— originally posted on https://www.2minutebitcoin.org/blog/an-honest-account-of-fiat-money-2018 https://2minutebitcoin.org
Original Author: Su Zhu and Hasu
Original Word Count: 1228
Original Posted Date: November 21, 2018
Original Source: https://medium.com/@hasufly/why-bitcoin-3fdee2328759
In the digital age, things happen gradually, then suddenly fast. Hyperinflation, bank runs and crises all unravel at the speed of light. Bitcoin exists as a life raft - the solution to the money problem that is global QE.