Inflation: The Ultimate Time Thief

“Paper money eventually returns to its intrinsic value – zero.”

 Voltaire

During the reign of Nero (37-68 A.D.) the Roman Empire embarked on a disastrous policy that was one of the major contributors to its eventual demise. In order to pay for the cost of maintaining their empire they started debasing the currency by 'clipping' bits of gold from the existing coins and then using the purloined gold flakes to mint new coins. As the empire kept expanding, the coins kept getting smaller and smaller. Prices kept rising while the purchasing power of each clipped coin went down. By 265 AD, prices had increased by 1,000% throughout the empire which ultimately led to the people being taxed more. As trade ground to a halt the economy was eventually paralyzed by a debased currency, hyperinflation, and high taxes. [1] Rome eventually collapsed as a result and history has continued to repeat itself ever since.

In recent times Venezuela, Lebanon and Turkey serve as examples of this phenomenon. The Lebanese pound has lost at least 90% of its value against the dollar and reached an all time high inflation rate of 201% in November 2021. For example bank workers whose salaries were worth the equivalent of $1 500 a month before the crisis began are now worth the equivalent of $100 as runaway inflation decimates the purchasing power of their currency. Lay-offs are now the order of the day as companies try to cut costs and more than two-thirds of people in Lebanon now live below the poverty line as a result of this. [2]

Turkey is currently experiencing the highest inflation rate in twenty years with its inflation rate standing at 36% and the Lira is expected to continue declining against the dollar for the foreseeable future. The BBC’s staff members of the Istanbul bureau recently went on strike after their employer, the BBC, was only prepared to give them a salary increase of just 20%, against the 36% inflation rate. All of these staff members are paid in the Lira. Negotiations were still ongoing at the time of writing.

The Venezuelan Bolivar has now been reduced to scrap paper status with a whopping 686% inflation rate as of December 2021. The minimum wage for civil servants and retirement payments has plummeted to the equivalent of $2 a month while monthly salaries in the private sector average $75. Consequently more than three million Venezuelans have fled the country in search of greener pastures as a result of this economic crisis, which has now morphed into a humanitarian crisis as well. As the global economy reels from the disruptions caused by the pandemic these hyperinflationary events are likely to become more prevalent in many countries around the world.

These hyperinflationary episodes are usually diagnosed as simply economic mismanagement by the government, and while there may be an element of truth to this, it is not the entire picture. The reality is that hyperinflation is the end game of all fiat based monetary systems. While the citizens of these countries that are experiencing hyperinflation usually turn to the dollar as a safe haven, as their own local currencies collapse, the fact of the matter is that the foundations of all fiat currencies are functionally identical and the dollar is merely the strongest of a weak lot. All fiat currencies (including the dollar) gradually lose value over time. This is all by design and while the rate of loss in purchasing power differs from one currency to the other the end result is the same. The chart below outlines the decline of purchasing power of the dollar since 1913.

[3]

To put things in perspective $100 in 1913 is worth the equivalent of approximately $2 816 today or put simply, a dollar in 2022 can only buy 3.5% of what it could buy in 1913. Modern economics considers inflation to be normal and healthy for an economy but the reality is that it’s a wealth transfer mechanism that builds up slowly at first then accelerates rapidly with the monetary system ultimately collapsing.

“Inflation is a way to take people's wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.”

Thomas Sowell

The first thought that usually comes to the minds of most people when they hear the word ‘inflation’, is that of rising prices of goods and services. For most, it is a feature not a bug of the current fiat monetary system that is all but unavoidable. It is considered normal for money to lose its purchasing power over time, and few have ever bothered to question why that reality exists at all.  It brings to mind a parable narrated by David Foster Wallace during his 2005 commencement speech at Kenyon College which is as follows;

“There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What is water?”

The moral of the story is that the most obvious important realities are the ones we are usually unconscious of and blind to. Like the two young fish, we became lulled into a hypnotic state of existence that ignores the obvious and takes for granted what is. As people from all walks of life go to work every day, working harder for more money, few are asking themselves one of the most important questions, ‘what is inflation?’ If inflation is to be understood as a hidden wealth tax, as Sowell suggested in the above quote, then why is it so few understand it? Is it a problem that can be solved once and for fall or are we doomed to managing it like a chronic disease? It is these and other questions that I seek to explore the answers to in this essay and to put forward Bitcoin as a potential solution for addressing this problem.

“Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.”

Ludwig Von Mises

Econ 101 tells us that supply and demand are the underpinnings of an economy as they affect prices of goods and services. The same rule of supply and demand can also be applied to money supply. Simply put, increasing the money supply usually leads to loss in purchasing power of the currency over time and thus higher prices.  Upon comparing the graph below that shows the increase in money supply of the dollar, with the one above that highlights the loss of purchasing power of the dollar; the aforementioned pattern becomes glaringly obvious.

[4]

As the money supply continues to gradually expand overconsumption and misallocation of capital (as easy money flows into bad investments) become the norm leaving the nation, as a whole, poorer when the bubble eventually bursts.  This is the phenomenon described as the ‘silent wealth tax’ but there is yet another side of inflation that is yet to be largely explored, and that is: inflation as time theft. If every unit of currency in your possession is a result of your investment in time in acquiring a skill as well in producing a product/service, which you now trade for money, therefore what is actually being devalued and undermined by inflation is the value of your time. Your valuable skills become worth less and less (even if the nominal price for them goes up), and the market acquires them at a distorted price and ultimately to your disadvantage.

Time is the scarcity, and it's the commodity we can't create any more of.

Jim Mitchell

Time is the most finite and valuable resource that we have. We cannot create more of it and therefore how we use it is extremely important. Most technological inventions came into being with the intent of increasing efficiency by reducing the time (as well as effort) required to complete a given task. Money evolved as a mechanism for humans to preserve the value of the time invested in production as this would also allow them to exchange it in the future for other people’s time and hard work.

In the same way a stock certificate is title to a company’s capital, money is title to human time. People sacrifice their time for money, which enables them to trade for commensurate sacrifices from others. When prices are distorted, we are each inhumanely robbed of making fully informed personal choices with our time. Central banks have a monopoly on issuing currency and there is no limit to how much currency they can issue at any given time, and through their control of the printing press they indirectly control the value of our time. If you give anyone the power to print money, they will print money. A tool that can command human time is an object of great temptation. [5] Inflation is a way to get something for nothing. In other words, by printing more money everyone else is forced to sacrifice their time and energy to obtain it.

 Money makes planning for the future possible and this is the reason why we save and invest. Every investment decision is about making trade-offs in the present by sacrificing consumption and postponing certain benefits to the future. It’s a “time-trade”, between the present and the future with money as the medium that facilitates future consumption across space and time. When the value of money is stolen via inflation, the time invested in capital acquisition has also been stolen; as this means either additional time is now required for the investment to pay off (i.e. longer waiting period) or more money is required to keep things on track. If you consider money to be a mechanism to freeze and store the value of your time, then the loss in purchasing power decreases the value of the future trades of your time. The greatest problem with inflation, apart from stealing your wealth, is that it steals your time!

Most people misdiagnose this problem as a signal for them to work harder in order to make more money and they also negotiate for higher wages with their employers. Whilst in the short to medium-term these solutions can help to keep one afloat, they don’t actually solve the real problem of wealth confiscation and time theft. Ever rising cost of living keeps them locked into a never-ending race of trying to stay ahead of inflation. To make matters worse the inflation rate is usually higher than the average wage increase.

All of these scenarios raise more questions than answers but the biggest question of all is what can one do to safeguard themselves against the ever looming threat of inflation which is constantly hovering like the sword of Damocles? This is where Bitcoin comes in as a solution.

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”

Satoshi Nakamoto

In case you are still not clear on what Bitcoin is, it is simply a decentralized form of electronic cash that can be transmitted over the internet without a financial institution acting as an intermediary. Commonly referred to as “magic internet money” Bitcoin can also be thought of as a permissionless, internet-native monetary system that facilitates global peer to peer transactions. Without going too deep into the technical details of the Bitcoin architecture (these will be explored in part 2) here are a few key things to remember:

·         Only 21 million Bitcoin will ever exist thus making it provably and finitely scarce. This makes it the most suitable asset that can store and transmit the value of time; which is also finite and scarce

·         The rate of Bitcoin issuance is constant regardless of the price and its supply is entirely unaffected by increased demand (contrast this with gold which when gold prices are higher, more gold is mined thus ultimately pushing gold prices down)

·         The number of Bitcoin issued is cut in half every four years, commonly known as the Bitcoin halving, and its annual supply growth asymptotically approaches zero over time.

·         Bitcoin is fully decentralized and censorship resistant. No single entity or authority controls it and final settlement is not reliant on any third party. This also makes it immune to counterparty risk during transactions

·         Everyone has the same property rights, whether they are a fireman, doctor or billionaire and these are enforced equally

·         Bitcoin is neither coercive nor involuntary. Fiat currencies on the other hand have no opt out and one is forced to use whatever currency the government of their jurisdiction deems to be legal tender even as that currency is losing value

All these properties and more make Bitcoin the ideal inflation hedge that is almost impossible to corrupt. Its monetary properties are vastly superior to any other form of money used today. Some have described it as digital gold and rightly so because Bitcoin has all the features (and more) that made gold sound money for thousands of years.

For the more than 1 billion people around the world that are currently living in countries where double and triple digit inflation is the norm Bitcoin offers them an exit to an alternative monetary system. The citizens of these countries who did the “right thing” and worked hard, saved their money, lived within their means hoping to be financially stable in their retirement years have seen decades of hard work that they put in (i.e. time) go up in smoke. Their pensions and investments have been decimated as the cost of living continues to skyrocket. How does a 70 year old retiree, who can’t work anymore, deal with such a problem? What would you do?

“How long can a central bank continue with inflation? Probably as long as people are convinced that the government, sooner or later, but certainly not too late, will stop printing money and thereby stop decreasing the value of each unit of money. When people no longer believe this, when they realize that the government will go on and on without any intention of stopping, then they begin to understand that prices tomorrow will be higher than they are today. Then they begin buying at any price, causing prices to go up to such heights that the monetary system breaks down. In the long run, inflation comes to an end with the breakdown of the currency.”

Ludwig von Mises

At the very least Bitcoin is an insurance policy for the individual against reckless government spending and unlimited money printing. It’s the opportunity to own a piece of a digital monetary network that is largely incorruptible and sound. On the flip side, with the price of Bitcoin having gone up an average of 160% per year it is also a good monetary store of time. A $100 investment in Bitcoin in 2010 is now worth approximately $65 million today! Buying Bitcoin as insurance is a small price to pay for the potentially catastrophic monetary disasters that are looming which are more costly in terms of destroyed purchasing power and “lost time”.

Other investments like stocks, real-estate and gold while they have their advantages, are lacklustre when compared to Bitcoin. For example if you owned prime real-estate in Venezuela today, you can’t physically move that property out of Venezuela to a more friendlier jurisdiction, secondly while the price of the real-estate will definitely increase as the Bolivar loses value how long would it take to liquidate that asset? Who would buy it and at what price? Even if you did manage to sell it how easily could you move the money outside of Venezuela?  That’s not to suggest that the asset is impossible to liquidate or that there aren’t ways around some of these bottlenecks, but this example is meant to highlight the complexities of such an investment in a country that is in the throes of hyperinflation. Bitcoin on the other hand can be liquidated easily anywhere in the world for a set price, it’s portable over space and time, it’s easy and cheap to store (you can store millions worth of Bitcoin on a $100 smart phone) and it’s almost impossible to seize or confiscate.

I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop.

Friedrich A. Hayek

In conclusion if inflation is the problem, then Bitcoin is the solution. All fiat currencies in history have always returned to their real value which is zero and their imminent collapse is a matter of ‘when’ not ‘if’. They all lose value over time, albeit at a different rate, but should the loss of purchasing power be acceptable at any rate? As Michael Saylor aptly puts it, “The road to serfdom is working extremely harder for a currency that is getting exponentially weaker.” Bitcoin is an exit from that road and is an opportunity to travel on a more prosperous one.

Acknowledgements

[1]

Business Insider, “How currency debasement contributed to the fall of Rome,” [Online]. Available: https://www.businessinsider.com/how-currency-debasement-contributed-to-fall-of-rome-2016-2?IR=T. [Accessed 16 January 2022].

[2]

Trading Economics, “Lebanon Inflation Rate,” [Online]. Available: https://tradingeconomics.com/lebanon/inflation-cpi. [Accessed 16 January 2022].

[3]

U.S. Bureau of Labor Statistics, “ Consumer Price Index for All Urban Consumers: Purchasing Power of the Consumer Dollar in U.S. City Average [CUUR0000SA0R,” FRED, Federal Reserve Bank of St. Louis, [Online]. Available: https://fred.stlouisfed.org/series/CUUR0000SA0R. [Accessed 16 January 2022].

[4]

Board of Governors of the Federal Reserve System (US), “M2 (DISCONTINUED) [M2],” FRED, Federal Reserve Bank of St. Louis, [Online]. Available: https://fred.stlouisfed.org/series/M2. [Accessed 16 January 2022].

[5]

Stoneridge Capital, “Stone Ridge 2020 Shareholder Letter,” [Online]. Available: https://www.microstrategy.com/en/bitcoin/documents/stone-ridge-2020-shareholder-letter. [Accessed 15 January 2022].