Inflation (Fiat đ” )
Weâre all accustomed to an economic system governed by inflation. Since birth, the cost of living has been on the rise but so has the amount of money in circulation. The markets experience a rise in prices even when thereâs also a rise of money in circulation because of the supply and demand phenomenon. Prices continue to rise because the supply of goods and services remains steady in relation to the increase of the money supply.
Why the supply of goods and services fail to rise along with the supply of money is a study for economic students. If I were to guess, I would say money is being printed at an alarming rate that it is impossible for supply to keep up. Another reason I guess would be that most of the new money supply gets distributed to the top 10% whilst the rest of the 90% represents most of a nation's demand.
Inflation has been around for so long that many economists argue that it is the better of the two systems. The markets have also learned how to adapt and make sense of where the current supply of money stand. When thereâs more money out there itâs only a matter of time before the markets realize it and capitalize through price increases.
Now, most of successful businesses are in favor of inflation because they keep competitors away by raising prices and not leaving much capital out there to entice new businesses into coming in. It is also in the Reserve Bankâs best interest to implement inflation because if more people enter the business world, it creates more sellers than buyers. Clearly, if thereâs more supply than there is demand, then the Reserve Bank would lose its power.
An inflationary system is almost the perfect scheme in that most of the problems that arise in the economy are solved or postponed by printing more money almost in perpetuity. Last I checked the USA had a debt of 21 Trillion and that is rising every second. Whatâs stopping them from printing that amount and paying the debt?
This system clearly benefits debtors because more money will be printed tomorrow for you to get your hands on. Donât rush to get into debt though because loan rates may be high for you to pay back. Those who greatly benefit is the top 10% because theyâre provided much lower rates than the rest of us and can easily repay those loans after making some investments.
One fact I find funny in regards to banks is that they will never loan you money if you donât have any but will persistently encourage you to take a loan when you have money and donât need it. They will pursue you and entice you with offers that are too good to pass by. Itâs kind of the same mentality adopted by casinos â when youâre rich theyâll provide you with free accommodation, exclusive event tickets, and other excursions just to get you playing in their casino.
Inflation has become synonymous with Capitalism that itâs hard to imagine one working without the other. If the last sentence is true, then does it mean that deflation is by default a cousin of Socialism?
Deflation (âżitcoin)
It is characterized by a decline in prices either as a result of a reduction in money supply or less consumer spending (demand). I donât remember the last time I saw a decline in the price of products across the board except when thereâs a short promotional sale for certain products, but generally, the price always rises.
In fact, one of the only sectors that consistently shows a decline in prices is the technology sector. Radioâs, tvâs, computerâs, smartphones, etc. continue to decrease in price as new technology emerges. But in this instance, it makes sense for older models to decline in price along with demand for current devices because demand is redirected to newer and better models.
The resulting effects of a deflationary economic system are mostly negative in my opinion. Letâs imagine thereâs a reduction in money supply or demand. Yes, goods and services would be cheaper but there still would be about the same number of people who afford them. A deflationary system would reward those who save their money instead of spending it thus creating even less demand and a further decline in prices.
Also taking into account that paper money (fiat), can easily get destroyed or lost which further limits the money supply. How long would it be before more money needs to be printed out just to keep things stabilized? Once a resource is that scarce and valuable it brings rise to many criminal acts to steal your money.
Another negative thing about deflation is that it destroys many businesses because thereâs a low demand compared to a high supply. This could easily lead to a monopoly on the markets with only one or very few companies controlling the supply and prices of products and services.
The allure of being an entrepreneur wouldnât exist in this kind of environment. No matter how hard you worked youâd basically be stuck in the middle class along with the majority of people. Theyâd be no such thing as âThe American Dreamâ.
I can see how deflation could lead to a socialist system where much of the countryâs production and distribution of goods and services are owned by the public and not the state. This means the profits of the country are shared equally amongst its citizens.
Bitcoin is a deflationary money system because its supply will never be more than 21 million and that will continue to decline due to natural outcomes such as loss or death of bitcoin holders. As stated in previous paragraphs this is a losing proposition but because there are other digital currencies coexisting with it, then it becomes a great store of value.
Its characteristics will reward those who save it for the long term especially considering itâs not bound in a single country but available to all 7+ billion people on Earth. Unlike with banks where only 1.2 billion people have access to a bank account, there are roughly 3 times more people with access to the internet thus access to Bitcoin and other cryptocurrencies.
Which economic system do you think is the best one for worldwide use in the long term, especially in a world that's becoming more and more technological by the day?
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