Inflation Explained Simply (why Bitcoin should matter to you)

Understanding inflation is a crucial part of understanding how money works and making money work for you.

Your future is worth protecting

If you’re totally new to Bitcoin and feel overwhelmed by everything, that’s valid. It’s a rabbit hole! Hopefully, my explanations of some fundamental concepts can help you understand more about money, inflation, and why we need Bitcoin.

To learn more about Bitcoin, check out my previous blog –> I want to learn about Bitcoin, but I don’t know where to start!

Learning about crypto opens a whole world to learn about how money works, understanding wealth inequality, and more. If you’re reading this, you’re probably already aware that something isn’t quite right with the current financial systems. Perhaps you have personally experienced system failure through debt or a savings account that doesn’t seem to go any direction but down. By reading this article, you’ll be closer to understanding how we got into this economic situation and what you can do to protect your financial future.

Whether you know it or not, inflation is affecting you right now. Every dollar you make, save, and spend is affected by inflation, but what does that mean?

First ask yourself: What is money?

It’s a way to store value and an accounting method. In economic terms, money and currency are technically different things. While money is a thing of value, like wheat or cows, not everyone will accept wheat or cows in exchange for their goods or services. That is why currency, representative money, was created. Instead of trading raw goods today, the potential value is stored in paper bills which are supposed to represent a valuable commodity like gold or silver.

When you turn your energy and time into work, you get paid in currency instead of wheat or tacos, right? Much easier to carry and trade for the goods and services you want.

Second ask yourself: What backs the dollar? What makes it more than paper?

Well, it used to be gold. Once upon a time, each piece of U.S. currency could be exchanged for its equivalent gold value.

However, this has not been the case since the 1970s, when Richard Nixon officially cut the tie between USD and gold. No more gold standard. So what backs the dollar? The short answer — nothing.

Basically, the dollar is something we accept as having value, but it doesn’t really. The term for a currency backed only by the government and no valuable commodity is called fiat currency. Every fiat currency in the recorded history of humans has failed.

Here is the quick and messy reason the world still accepts the U.S. dollar despite its inherent lack of value…

During the World Wars, the U.S. supplied allies with aid and got paid in gold. By 1944, the United States had become the world’s largest holder of gold and was doing well economically. After WWII, 44 nations came to Bretton Woods, New Hampshire, to work together to rebuild the international economic system that had been decimated.

During this time, the U.S. dollar was strong and reliable because we had the gold to back it. The currency (papers & coins) represented gold in the vault. The world knew we had the gold in the bank to give our paper money some meaning. This is how the USD became the global reserve currency. Instead of gold reserves, other countries began accumulating reserves of U.S. dollars.

However, from the 1950s to 2021, the amount of gold in U.S. vaults has significantly decreased. In fact, there is no official reporting of total gold in banks… but what we do know is that there is more gold ownership through paper (bonds, funds, futures) than exists in the world.

How does that work out? It doesn’t. If the gold isn’t in your hand, you don’t own it. If everyone with a certificate of gold ownership cashed in now, there would not be enough gold to meet demand.

(Maybe that’s why the United States has outlawed its own citizens from owning gold not once, but twice!)

Even if we wanted to go back to the gold standard, the U.S. does not have the gold to back as much currency as it has created.

And so, no sane country can say, “ Your money is worth nothing. We won’t take it!” because chances are the value of their currency is directly related to the value of the dollar. In short — it’s a stalemate.

Third, ask yourself: Where does “money” come from?

Simple answer: The Federal Reserve prints it off a machine, like Monopoly money.

When the government needs to pay for things like war, social security, govt. salaries, stimulus, infrastructure, or even something they may not tell us about, they print it and settle the debt. This doesn’t actually solve the problem; it simply gives us a little more time before facing an even worse situation.

Photo by BP Miller on Unsplash

Every time the federal reserve prints money without increasing the amount of gold in reserves, each dollar that exists becomes worth less.

Eh voila, there you have it — inflation.

Candy was 5¢ in the 50s; the reason we’ve added two zeros and then some is because of inflation. Money is worth less, and everything is getting more expensive, yikes!

Economists and governments talk about inflation as if it’s normal and expected, but the truth is that it’s not necessary for a healthy economy. It’s the result of poor money management by elite financial systems that want to make you feel like money is “too complex” for you to understand, so don’t ask too many questions and definitely don’t start looking for alternatives!

In November 2020, Citibank revealed a senior analyst predicted Bitcoin could potentially hit a high of $318,000 by December 2021, calling it “21st-century gold.”

What’s the problem?

People used to save money from their hourly jobs and could expect it to increase in value. The whole “back in my day bought a house by age 23” narrative isn’t quite so common these days. Saving money is practically pointless because the rate of inflation decreases the value of USD much faster than a bank giving you a measly .1% APY.

The ultra-rich will always find ways to make money, but the economy depends on a strong middle class with upward mobility. The middle class is dying because people now have to go into debt just to have a basic standard of living.

To put it in perspective, the top 10% of wealthy families own 76% of the wealth in the US, while the bottom 50% own just 1% of the wealth.

What enables people to become rich? Do they work at jobs that pay them million-dollar checks biweekly? No. They become rich by buying and owning assets (real estate, investments, gold, inventory, etc.) that go up in value. The middle class comparatively doesn’t hold many investable assets.

In an economic crisis, the government tries to “help” by printing more bills, which causes inflation. This causes asset prices to skyrocket! Since most assets are owned by the ultra-wealthy, their net worth increases significantly, while everyone else is left unable to afford to invest their money because they have to spend it all just to get by. This was not the case decades ago when investment assets were much cheaper and more accessible to our parents or grandparents. Back when a 401k meant something…

Inflation enforces the wealth gap.

The rich get richer and they didn’t have to lift a finger, the government did the work for them.

To top it off…

The U.S. Bureau of Labor Statistics (BLS) reports the CPI (Consumer Price Index) monthly by calculating the weighted-average price of a broad selection of goods and services. Toothpaste, jackets, apples, plane tickets, hair cuts…. The percentage of inflation is the difference between those measurements.

However, items included in the CPI changes over the years (convenient…) and do not include costs such as out-of-pocket medical expenses, real estate, insurance, income tax, sales tax, social security taxes, environmental factors such as water quality & education, investment vehicles like stocks and bonds (EVEN MORE CONVENIENT…)

The rate of inflation as reported by the BLS in February 2021 is 1.7%; If you include the regular daily/monthly/yearly living expenses that are excluded from their estimations, the number moves closer to over 10%.

I don’t know about you, but insurance and taxes aren’t optional for me. At this point, you might be thinking: each dollar I earn is worth less and less, my wage has hardly moved, and prices are going up; why don’t they count those things towards my basic living expenses?

Hopefully, by now you agree, inflation is a problem.

Check out this real-world example of a country on top, toppling:

Argentina began the 20th century as one of the wealthiest countries in the world. By the 21st century, their economy was in severe decline. In 1998–2002, during an economic crisis, the Argentinian government turned their money printing machines on high to “solve” the debt crisis.

The result? The peso’s value shifted so dramatically that people had to run through grocery stores buying necessities as quickly as possible. From the time they stepped into the store to check out, the prices had already increased.

People didn’t want to keep their hard-earned money in a currency that would continue to deteriorate; they wanted to store value by saving and someday retire or make large purchases. So they began converting their cash into USD (and Bitcoin) since it held value better.

What happens when the world reserve currency, USD, is losing its value? It’s Argentina in the making… 📉

Here’s where Bitcoin comes in.

Bitcoin solves the issue of inflation and secrecy behind money. There are 21 million bitcoins that can ever exist and each Bitcoin can be broken down to a decimal of .00000001. Like a hundred dollar bill can be broken into change.

Scarcity is what makes money valuable, and Bitcoin can never be inflated. No government can hide the accurate amount of value in the Bitcoin economy, and they certainly can’t print more to balance debts and pay for miscellaneous wars. Everyone can know exactly how much money is in circulation at all times.

Bitcoin cannot be counterfeited. No one person, government, group of computer programmers or billionaire controls Bitcoin, not even the original creator by the pseudonym Satoshi Nakamoto.

Digital Gold

One hundred years ago, an ounce of gold could buy you a nice suit, pants, and shoes. Today an ounce of gold can buy the same thing as it has retained value, unlike the US dollar. 👀

Bitcoin is the digital age’s ounce of gold.

While gold is difficult to secure and transfer. Bitcoin offers the ability to store digital gold safer than Fort Knox without a fortress and guards. By buying Bitcoin, you turn your worthless US dollars into a currency that will retain its value like gold (but better).

It may appear that the price of Bitcoin is rising, but here’s a better way to think of it: Bitcoin holds its value, while the USD is losing value rapidly.

Young people today are born and raised in a debt-based economy, so it’s easy to assume debt and struggle as a normal state of finances, but it absolutely isn’t. We can return to a sound money economy where people can buy a house and raise a family on minimum wage. We don’t have to settle for unpayable loans and depleted savings. We can do what Argentina did, but instead of USD, buy Bitcoin.

Stop letting your money be inflated. Take control of your finances and let your monthly savings grow!

To learn more on “What is Money?” check out this video by the School of Block

I can’t stop talking about Bitcoin.