The mechanics of price stability and why is this a theft
Price stability is a theft. Because the dollar is a global reserve currency, we will concentrate on it. I'll explain in detail how and why price stability is a robbery. The Federal Reserve is mandated by Congress, in case you didn't know, they have two mandates: ensure full employment and price stability. They manipulate the money supply to achieve what they consider to be price stability. I'm not going to get into the fact that they're now defining price stability as an increase in prices, even though they're aiming for well over 2% inflation. So you can have 2% inflation on average, but 2% is still inflation, which is not price stability. It's a price increase, but we're not going to go there, we will only discuss price stability and how even that is robbing people who hold dollars.
To understand why price stability exists, we must first consider what would happen in our economy if the supply of dollars could not change. The M3 money supply is a broad measure of how much money is in the system. It is currently valued at around $20 trillion. So let's use $20 trillion and agree we're going to stop printing there. There is only $20 trillion that can exist and will ever exist. Let's agree that more than $20 trillion cannot be created. There is only one thing you need to do to make this happen, and that is to make lending money illegal. We've all heard that the Federal Reserve prints money, but that's not exactly how it works.
But, in essence, they do not print money and create money out of thin air. The Federal Reserve creates money in the same way that regular banks do. They create money by lending it. So, if you go to a commercial bank, let's say they take a $100 deposit from you. They'll be able to take that $100, and since you have a $100 deposit with them, they'll be able to take, say, $90 of that deposit and lend it to someone else. That $90 loan cannot be called at any time, but your $100 deposit can. You could go to them and withdraw your entire $100. The bank will fail if these are the only two transactions that take place. That will be a mini-bank run. Because you gave them $100, you go back to get it out, then they say: "Oh, we only have ten because we lent $90 of it out". You're going to say, "Well, give me $10," and the bank will close down because it is now insolvent. However, there are more than two players in the system. As a result, the banks repeat this process over and over again. But what happens to the money that has been lent? It only goes into another bank account.
When you get a mortgage, you're borrowing money that has already been lent into existence, which goes to the bank account of the person or company who sold you the house. When that person or company receives the funds in their bank account, they use them to pay their employees or to purchase a new home. And every time one of these transactions occurs, money is transferred into someone else's bank account. And then, whenever money is deposited into someone else's bank account, another bank that receives it can convert it into a new loan. This is referred to as fractional reserve banking, and it enables banks to create money out of thin air. You are not required to lend money that you already have in your vault or that someone else has deposited. You can lend out ten or a hundred dollars for every dollar deposited. This results in an increase in the money supply. The process by which the Federal Reserve creates money is essentially the same. They are only lending to the United States government.
So the US government says, "Hey, we need to borrow some money; does anyone want to lend us some money?" Then the Federal Reserve steps in and says: "Hey, we'll create a bunch of money and we'll loan that to you". It must pass through the banks, but that is the procedure. As a result, the Federal Reserve and commercial banks all increase the money supply by using fractional reserve banking. So the only requirement for stopping the robbery is to stop that process and practise.
So, what happens next? Assume that this stops and we are now limited to $20 trillion. You might expect money to concentrate in the hands of a few people right away. There are some extremely productive people in our society who have already demonstrated a great ability to create, produce, and accumulate vast amounts of wealth. And if you know how to make money and create wealth, and you have actual experience doing so, you are already better than someone who isn't there yet. As you become richer, it becomes easier to become even richer.
For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.
On the surface, many people think this would be terrible because wealth would immediately start to concentrate in the hands of a few. First of all, that's true. But second, that's what's happening today. It's not the lack of monetary expansion that causes wealth concentration. As I'll demonstrate, the opposite is true. Here's an example of how money does not equal wealth. Money is analogous to the number of pizza slices. Wealth is equivalent to the actual amount of pizza. Money simply represents the division of all wealth, whereas wealth is the amount of goods, services, products, and things you can obtain.
So, if you have an eight-slice large pizza, do you get any more pizza by cutting it into 16 slices? No. So, if you have a $20 trillion economy, do you get any more wealth by turning it into a $40 trillion economy? No. You simply doubled the money. You still have the same amount of physical items. And now, it only takes twice as many dollars to equal the same amount of wealth. To hide this and make it appear that there is actual growth from printing, the government is currently taking tiny fractions of purchasing power from each dollar, or in other words, taking tiny slices of pizza from each slice of pizza and making one new big slice, which is then assigned somewhere. As a result, they print a lot of money. And the only reason it has purchasing power is because they took a small portion of the purchasing power from each existing dollar. The funds are then distributed to whomever they see fit. As a result, printing or monetary expansion cannot generate wealth in the same way that cutting extra slices into a pizza cannot generate more pizza.
So what happens if the amount of money decreases? It's the inverse of inflation. It's called deflation. Instead of spending more money to get the same amount of stuff, it now takes less money to get the same amount of stuff. Things become less expensive as the number of dollars in the system decreases. Assume nothing has changed except that things have become less expensive. Is your life getting better or worse? It's a lot better. Who benefits if the cost of groceries falls, the cost of rent falls, the cost of petrol falls, the cost of cars falls, and the cost of healthcare falls? You, the customer. When things become cheaper, you become richer. You get more for your money.
What happens if there is someone who is hoarding money? The billionaires who keep accumulating money and taking it out of circulation. There is a limited supply now, with only $20 trillion available. So what if they continue to accumulate $100 billion, $150 billion, $200 billion, and $250 billion? They keep accumulating and hoarding more and more money. What effect does this have on the remaining money in the system? It makes money more scarce. They are removing money from circulation and from the supply. That reduces the amount of money available to everyone else. When everyone has less money, the result is deflation. You have fewer pizza slices, which represent the same amount of pizza, and fewer dollars, which represent the same amount of wealth. Things are becoming more affordable. Your dollars are more valuable in relation to the goods. In an economy where certain players hoard wealth and withdraw money from the system, everything becomes cheaper, and other people become richer.
What else is a result of things getting cheaper? I already stated that your life would improve. But whose life will be worse when prices fall? The persons' that are selling the goods. Revenues of companies that sell products will fall. In an economy with a fixed supply of money, there is deflation not only of goods and services, but also of asset prices. It's more difficult for the wealthy to remain wealthy in a deflationary environment than in an inflationary environment. In an inflationary system, wealth flows from the poor to the rich through the expansion of money. Wealth flows from the rich to the poor in a deflationary system with a fixed supply of money as life becomes cheaper, and revenues and profits fall.
Is this a solution to inequality? Absolutely not. However, it is a far superior system to the one we currently have. It would be fantastic for everyone involved if we return to a sound money system. When a country experiences long periods of deflation and when the supply of money is fixed, there is an increase in wealth and real wages. Despite falling nominal wages, people are seeing real wage growth. Their cost of living falls faster than their wages. In a world of finite resources, the only way to progress and experience long-term prosperity is to get more for less. Not in an inflationary system where you constantly get less for more money. Many economies and countries were ruined in this way.
That is what would occur if the supply of dollars could not be changed. But we all know that isn't going to happen. They will continue to exploit the fact that dollars are being used worldwide as a reserve currency , and they will print more of them to give themselves the purchasing power they want. Eventually, that game will be over, and no one will accept dollars when countries around the world no longer accept dollars as payment. However, by then, it will be far too late to convert your wealth into the next form of money. Looking at history, whenever the reserve currency goes through a phase where it begins to lose purchasing power very quickly, the people, on a decentralised basis, have already started to use sound money again long before the final nail in the coffin is driven. Throughout history, that has usually been gold. Who knows, it could be Bitcoin because the total supply of 21 million Bitcoins can never be increased, it is sound money.
Same with gold. Gold cannot be produced in the absence of labour or capital. It must be extracted and refined from the earth. This means that, throughout human history, despite the incentives to acquire more gold, the gold inflation rate has always been roughly equal to the population growth of 1.5%. Despite the incentives to acquire more gold, it has never exceeded 2%. So, in either case, they're safe bets, and if either of those is the money of the future, it will be a prosperous future filled with widespread growth and wealth for all involved.