Fiat Money: Global Theft

The rise of fiat money has had some benefits. Largely, it frees up the government from needing to stockpile gold. When the demand for money expands, it also prevents it from having to acquire more gold in order to expand the money supply. These resources are thus freed up and can be expended in other ways in the economy.

However, there is a hidden danger behind fiat money. Fiat money, through invisible strings, allows for wealth transfers from the entire population which uses that currency into the central coffers of the central bank. When the users of fiat currency becomes global, this process is expanded globally. The US is the “world reserve currency.” People from all corners of the world trade in US dollars and keep it in reserves. This, in some sense, allows for the US government to, at will, transfer money from the entire globe into its own economy.

In response to the COVID-19 pandemic, the US government printed $3.5 trillion. One may wonder how this is even possible. How can printing dollars, which costs almost nothing, actually retain real value? How can a piece of paper printed with “$100” on it actually then be used to purchase $100 worth of goods and services? It almost seems as if the US government is creating wealth out of thin air! However, the reality is much more sinister than this.

Printing money, as most already know, leads to the devaluation of the currency and inflation. However, the US prints money all the time, and its currency seems rather stable. This is because the amount the currency devalues would depend on the amount of money printed in proportion to the money supply.

To explain, let’s estimate the devaluation of the currency with a simple formula: D = B/(B+I), where D is the rate of devaluation, B is the base amount of money we started with, and I is the amount of money we increase the money supply by, or in other words, how much we printed.

For example, if there is a supply of $100 and you print $100, then the value of the currency would drop by 50%. If, however, there is $100,000 in the money supply and we print $100, then the currency only devalues by about 0.1%. In order words, by having a larger money supply, you can print more money with less consequences.

It is no wonder, then, that the US tends to pressure other countries into trading in the US dollar. The more people who use US dollars, the more money it can print without it significantly impacting its own currency. The US dollar is the “world reserve currency,” it is the most used currency in the world, so it is no surprise then that the US can also print far more money than any other country in the world without significant inflation.

This has yet to answer the question we started with. The US government prints money, and despite it just being a piece of paper, the money is still valuable, it can be exchanged for real goods and services. This seems, on the surface, to be creating wealth out of nothing.

However, wealth is not being created out of nothing. First, I explain in more detail why money can have value despite being just a piece of paper with no backing in this other post. Second, even though devaluation is very little, it does occur. The US dollar does inflate at around 1–2% every year.

Since everyone’s money becomes worth less, they are not capable of buying as many goods and services with that same money. The value of these goods and services that they can no longer purchase is equal to the value of the goods and services that the government can now purchase with its printed money.

In other words, the money is not created out of thin air, it is a wealth transfer from the masses of people to the Federal Reserve. The masses of people become ever so slightly impoverished, while the Federal Reserve then gains new wealth which it can spend. Like invisible strings, the Federal Reserve is capable of withdrawing money from the masses of people who use its currency into itself without anyone even noticing it happened.

Since the US currency is the global reserve currency, it is not just capable of doing this to its own people, but internationally. When the US government prints trillions of dollars to bail out its population, it is withdrawing this money from the global economy. All countries with reserves of US dollars will find their reserves can now buy back less than what was sold to acquire it. All countries who loaned money to the US will find that these debts are now worth less money than they were before. In fact, this is on of the reasons for printing money, for the US to lesson the burden of its massive debt.

The US’s ability to mass print money on such a large scale is not something every country can do. It is something inherent to the fact its currency has such a large supply and is globally used. This benefit also explains why the US pressures other countries to trade in US dollars, and may partially explain why the US economy is capable of maintaining GDP growth while the entirety of the European Union has not had any GDP growth in over a decade.

A developing country should be wary of trading in US dollars. They should either insist in trading in their own fiat currency, or in real, tangible assets, such as gold. Any fiat currency they acquire from the US will slowly devalue over time as the US prints money through its regular quantitative easing.

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真理zhenli

I have a Bachelor of Science in Computer Science. Coding and Marxian economics interests me. I write code for a living.