Has money lost its connection to reality?
š¤š Part 3 of What's broken with humanity and how crypto can help fix it. Smesher #015
In our previous post Is Money Evil? we mentioned the debt economy, and how it didnāt seem to make any sense for each of us to carry around a debt of about $32,000.
What weāre thinking about today, is what enables the debt economy. How can it be that individuals and entire nations live off of money that doesnāt exist?
Money for nothing
We might find the answer if we take a look at the money weāre all using ā paper money, or as itās called in economics āfiatā money. Fiat money is any āgovernment-issued currency, that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.ā (Investopedia)
But what does that mean, money that isnāt backed up by any tangible goods? Where does currency that doesnāt represent some real commodity get its value from? And, incidentally, why is it called āfiatā?
The answers are related. Fiat money is called that because it is money that comes into being as a result of a government decision. The word fiat means āit shall beā in Latin (more or less).
As for the fact that fiat money isnāt backed by any tangible goods, the way that works, surprisingly enough, is trust.
Trust in the government issuing the currency, is the thing that gives fiat money its value. āRather like the fairy Tinkerbell in Peter Pan, who is kept alive because the audience claps to affirm its belief in her existence, it is our faith that keeps the system going.ā (Philip Coggan, OECD Forum 2022)
Thereās something almost romantic in this description, in the notion that everyday trust, the type that allows you to cross the street without fearing the driver will run you over, is what powers the economy. But, also a bit disconcerting, donāt you think?
It becomes even more worrying when you consider the following:
That even the most trusted governments donāt operate in a void. A local economy is part of a global one, and a currencyās value fluctuates in relation to other currencies.
Governments rely heavily on central banks to bail them out of financial crises. And we should ask ourselves, āare we happy for so much power to reside in the hands of unelected technocrats, especially as their policies can have substantial redistribution effects?ā (Philip Coggan, OECD Forum 2022)
Trust no one?
So the question is, is trust enough? It often seems more like a leap of faith, as Neil Buchanan put it. He also suggested, that this collective agreement about the value of money, seems at times like a group delusion.
Or maybe the question isnāt, is trust enough. Maybe itās about whom to trust, and under which circumstances. Maybe governments and banks donāt deserve our trust. Certainly, both entities keep bailing each other out in a complex manner that is hard for most people to follow. And often, as with the U.S. huge COVID-19 relief package, it seems like they are pulling money out of thin air.
Whereas cryptocurrency suggests that we trust a group of our peers, within a mechanism that is almost foolproof against all types of attacks ā from malicious acts to power shortages. It offers āa global, decentralized, seizure and censorship-resistant, self-sovereign money and ledger system thatās free from government interferenceד (Lane Rettig, Why bitcoin mining is a good thing).
Gold. Always believe in your soul
Circling back to the question in the title of this post: Has money lost its connection to reality?
Consider this when you ponder the question: What, in reality, is the money you are using tied to? What does it represent? If money during the gold standard represented its worth in gold, and Bitcoin represents the work it took to mine it (hence called a Proof of Work protocol), what does the dollar you get from the government or from the bank represent?
Want to delve deeper into this? Here are some great resources
š Consider the connection between trust and fiat money, with the help of this 10-minute video on how the U.S. was able to finance its huge covid-19 relief package (ENDEVR)
Consider whether money can be trusted right now, with this informed opinion piece by Peter Coy (The New York Times)
š See which countries are at risk of debt with Debt Data Portal
Want to take action?
šŖ To help fight debt, visit Debt Justice
šŖ To empower financial education visit Eight Cents in a Jar or any of the nonprofits on this list