The case of fiat money is presented like this: it was started to facilitate exchange of products among people. However, as we now know, it has brought wealth to some people and nations while equally making many others poor. Just like the coin with two sides, fiat money has double-edged effects.
First, the fiat control mechanisms allow the government to adjust inflation however they like no matter the explanation that the adjustment is based on the economy trends. When this adjustment happens, the greatest worry people have with savings and compensation is that the purchasing power of their compensation or savings drops because the government decides to debase or devalue the fiat currency but Bitcoin fixes this, said Douglas Borthwick, who is chief marketing and business development officer of INX Services and who has over 25 years of experience in the finance industry.
"Crypto democratizes the investment process," he told The New Money. "While only the wealthy can buy a house or a masters painting, preserving their wealth, everyone can buy Bitcoin given its fractional properties. The value of bitcoin cannot be driven lower by supply - like fiat can. And so the employee being paid in crypto, or saving in crypto does not need to worry about the government increasing the supply of his or her fixed earnings and savings."
It is already known that fiat systems, to which we are already acquainted, gives rich people a better access to and control of the fiat banking systems and fiat itself. It gives an unfair advantage than would crypto whose access is equal for all, rich and poor.
"Fiat unfortunately creates wealth divides," said Borthwick. "It does so because wealthier people are able to convert fiat into assets that grow with inflation, thus preserving their wealth, whereas the rest of the population lives hand to mouth, and so the fiat that they work for becomes worth less and less and the prices of the goods they need rise more and more. Fiat only works well for those with disposable income, investing opportunities and education. For anyone lacking these attributes, fiat acts like a weight around the neck."
More people are now turning to using crypto
The prospect of modern monetary money theory and government control of fiat money has resulted in many people moving towards cryptocurrencies partly as a way to manage inflationary pressures and secondly, and quite surprisingly, as they believe it is a more secure form of money, according to Jason Blick who is CEO of online banking platform EQIBank.
Further, cryptocurrencies now facilitate instant movement of money across the world and have limited supply hence preventing inflation and overly printing. In comparison, SWIFT and other electronic cash settlement usually take days to process transactions, he said.
"In combination, these factors have resulted in up to 10% of the US population regularly using cryptocurrency," he told The New Money. "At this rate, more than 25% of the population could have exposure to this form of money within less than five years.”
The theory fiat is stable money goes that because it is legalized by government, fiat is stable and secure than any commodity-backed currencies and cryptos. The argument is, the ability to create and restrict currency flows in a fiat model allows central banks to address numerous economic variables such as interest rates, credit and liquidity, enabling a consistent and stable economy.
"While it's broadly assumed fiat money is stable, that assumption is not entirely accurate," he told The New Money. "One economic recession after another has demonstrated the inherent deficiencies associated with fiat money."
The perception that fiat money is secure allows central banks, regulators, and governments to circumnavigate the complexities of inflation and recessions by controlling the supply of the currency. This perceived stability permits fiat currencies to operate as a means of storing value and enabling exchange, he says.
However, it is in this circumnavigating and controls where the problem arises, according to Blick.
"Central banks can be subject to national and geopolitical risks and nuances, often resulting in excessive inflation or recessions," he added. "
Economists identify two leading causes of inflation, namely demand-pull and cost-push. Demand-pull inflation occurs when fiat money is limited compared to demand. Demand can go up due to a strong economy, a natural disaster, or an oversupply of money. In these instances, demand outpaces supply and "pulls" prices higher. Cost-push inflation is the opposite: when the cost of production increases i.e., from higher salaries or costs of materials, etc. This results in an increase in prices for services and goods as inflationary pressures result in prices being "pushed" up by rising production costs.
"From a practical perspective, the printing of USD increased in 2020 at a pace not seen since the end of World War II," he said. "While the FED does not subscribe to modern monetary theory, or MMT — the idea is that the US can print or borrow as much money as its elected officials desire. There is a pattern developing where this appears to be the case. The United States is now running its biggest budget deficits since World War II or 14.9 percent of Growth National Product last year and 10.3 percent this year. Total debt easily exceeds 100 percent of Growth Domestic Product. It's a policy that cannot continue indefinitely without substantial ramifications."
Keith Hart, a professor at the University of Cambridge, in his research about money, also supports the fact that the power of governments to create money benefits the people who are close to the issuance – the people who get it first. It widens the gap between the rich and poor.
He says when new fiat money is injected into a fiat system, it comes in form of loans and the first recipients are banks and financial institutions. Since the super-rich receive it at a higher percentage in form of loans than any other person, they stand at an unfair advantage or so argues Philipp Bagus in his book Blind Robbery!: How the Fed, Banks, and Government Steal Our Money.
“They have an easier access to the new money produced by the banking system in form of loans, because they can offer collateral,” he said. “They can offer real estate as collateral for new loans using these loans to buy even more real estate or stocks pushing up prices.”
In contrast, poor people do not receive the loans easily because they do not own assets. They have to observe prices being pushed up and them getting poorer. They get easy loans at bubble times. In some cases, price inflations in fiat systems erode away the value of savings and value of debts and it makes it hard for poorer people to own assets.
Proponents keep telling us only the benefits of fiat
The reason we see fiat money as largely helpful is because most theorists have told us a lot about only one side of the coin while ignoring the other extreme, says Hart. Unfortunately, fiat has created disparities and is largely an influence tool used by states and governments to control wealth for their selves and dictate how they get to organize societies.
Wouldn't crypto create inequalities as well?
And while any system even in a free market would result to an income inequality, there is a difference between morally justified and unjustified inequality, argues Bagus.
“When someone gets rich because he is productive and satisfies the wishes of people in a cheaper and better way than his competitors, we should applaud him,” he said. “The resulting income inequality is justified. The problem starts if someone earns an income due to government intervention such as licenses, other regulations, or simply tax transfers. The resulting income inequality is unjustified. Getting richer at the expense of others through the use of the fiat monetary system, which represents a government monopoly and banking privileges, is unjust.”