A Utrust original on why fiat is inflationary by design and what the alternatives should look like

Why We Build is a series. The first chapter is about the relationship between fiat money and debt, and how true ownership of fiat is impossible to prove. It’s already out, and you can find it here. If you’d rather watch the short video we made to illustrate this concept, go to our YouTube channel, right here.

If you’d rather start with this article, they are not narratively linked, so go right ahead!

Have you ever heard the sentence “low and stable inflation”? A quick peek at Google will reveal over 45 million results, which will give you a broad notion of how much it has become a part of economic orthodoxy in recent history.

But what exactly does it mean?

We have embraced inflation

Inflation, of course, is a general increase in the price of goods and services. It can stem from issues pertaining to supply, demand, or both. Severe inflation has equally severe consequences. Some of these consequences are obvious. Prices are all connected, so a change in the price of a single item will impact others. Let’s take gasoline as an example, since it’s easy to see the chain of events. Gasoline is more expensive. This affects the price of food items, because farmers consume lots of it. It also affects the prices of many other supermarket goods, because distribution becomes more expensive. All of this makes restaurants more expensive, as well as bars and cafés, and so on and so forth.

Other consequences of inflation aren’t so immediately evident. Why would inflation cause, for example, a mortgage crisis?

Because central banks only really have one move up their sleeve to control inflation: raising interest rates. The logic for this is quite simple. If you raise interest rates, borrowing becomes harder. If borrowing becomes harder (and paying back what you owe as well), then less money will be flowing into the economy, which should lower demand for goods and services across the board.

If you increase rates too high, though, you will start cutting into a kind of loan that people tend to have hanging over their heads for long periods of time: mortgages. Some are worried that’s the direction we’re headed now.

If high inflation is so dangerous, and if we have very few tools to help curb it once it gets out of hand, why do we love “low and stable” inflation so much?

Centralized institutions have no answer for deflation

Deflation, or persistently falling prices, is the opposite of inflation. It may seem like that’s a desirable scenario, but it can have a number of very dire unintended consequences. When prices are falling consistently, the incentive to keep hold of your money instead of spending it or investing it, are very great.

This can paralyze an economy, lower wages, and lead to stagnation.

There are, however, a plethora of solutions available to governments to deal with such things, namely by introducing money into the economy themselves. If money is becoming more valuable with time, so too is the power of the government’s reserves growing.

To put it simply, both inflation and deflation cause transfers of wealth. While inflation transfers wealth from the people who own liquid assets (i.e. money, your savings) to borrowers (including governments), deflation does the exact opposite. In fact, one of the reasons deflation is so heavily associated with political unrest is the relation between deflation and debt.

This is where we recommend that if you haven’t read our first article, you go take a look. Fiat is strongly related to debt. Over 90% of all US Dollars in circulation exist only as what’s called a deposit liability, an IOU from banks to you, the final user of fiat currency.

Inflation keeps fiat stable

Let’s say we have, as we did during the Great Depression in the United States, an average yearly deflation rate of 10%. In this case, even an interest-free loan will be very difficult to repay since it will require money worth 10% more with every passing year. Now consider that every checking account in the world is in fact debt the banks have no reserves to repay. If we favored “low and stable” deflation, we would be burdening banks with an increased difficulty in keeping up with their commitments of the same percentage as deflation. This is the system as it exists today.

Lowering the value of money consistently, while never allowing things to get out of hand, is how we make sure that banks, central and commercial, can continue operating.

The consequences of this for everyday people, however, are dire.

Crypto is a real alternative

Plenty has been written about the growing pains and mistakes that the crypto industry has committed in the last couple of years. Now is the time to start writing about the things that have gone right.

Bitcoin was created by Satoshi Nakamoto in the wake of a massive financial crisis. The people who framed crypto and this new fully digital, technology-backed, form of money understood the problems with debt and continuously devaluing money. 

When the system was built to prevent saving, and to make it almost impossible for everyday people to actually own their funds, crypto works in the opposite way:

1 – No middlemen: Banks, central or commercial, have no influence on the value of blockchain-based currencies. It’s pure supply and demand.
2 – Full transparency: All transactions are recorded on a public ledger that can be viewed by everyone.
3 – Different coins and tokens have their own economic models: Tokenomics and incentive models are publicly available (here is ours) and users can make informed choices.

Like we said in the previous article, the issues we have discussed over this article aren’t circumstantial or easily fixable. The current financial system has been built all over the world by governments of all stripes, with millions of pages of economic policy trying to achieve stability. And yet, anyone age of 30 will likely see the second recession of their adult life within the next 12 months.

What we are building at Utrust seeks to replace this very human system, built over trial and error, with legacy problems that run deep to its core with a solid system, built from scratch with the Internet in mind.

Our willingness to create a system where your money isn’t programmed to be worth less every year is absolute.

If you own a business and you are ready to experience the speed, reliability, and security of crypto payments, here is where you can find all the information you need.

If you don’t but you are ready to embrace true ownership of your financial future, we recommend the Maiar wallet as a starting point.

We hope you enjoyed the article, and it gave you food for thought.

Follow us on socials so you don’t miss part 3, where we talk about the government’s role in fiat, and why we believe we have a better solution.