Many of the problems in our country have to do with the difference between Real Money, and Fake Money. Ideally all of our money would be backed by some commodity with a relatively inflexible value, like Gold, or Silver, or Bacon. If we had Gold Backed Money, then there would be no such thing as Fake Money.
But it has been many decades since all of the gold was confiscated and spent, and all of the pre-existing gold in the treasury just spent outright. We have a FIAT system now. Basically that means the value of it is based on how much there is of it, and how much people want it. Since the laws of Supply and Demand are inviolate, fiat systems can work.
That is, until you start running into Fake Money.
Ignoring inflation for a moment, Real Money would have a value because there is only a finite amount of it (including the amount sitting in banks), and that finite amount can only be used to purchase so much. Because there is a supply of paper bills, and a demand for them to purchase products, Paper Money has a Real Value.
But the first issue with fake money comes from Government Assistance Programs. Let’s take a guy, and call him “Person A.” He is a carpenter, and works for $10/hour, 40 hours a week. $400 a week paycheck (ignoring taxes) might not seem like much, but to Person A it is a lot. He remembers every single nail he had to hammer to earn that $10/hour. He remembers the back breaking labor required, the mind bending mathematical problems to get the house straight… He remembers every ounce of effort it took to earn that $400.
And then we have “Person B.” This guy gets a welfare paycheck and social security disability payments. Let’s assume that he coincidentally gets $400 a week. How hard did Person B have to work to get that $400? Did he actually add anything to Society to earn that $400?
So we see the first instances of Fake Money. Real Money is taken from productive people and given to someone who isn’t productive. Because the welfare check is unearned, the Real Money becomes Fake Money. While the Carpenter goes out into the Marketplace with the $400 he earned and decides how to best spend it, so does the welfare recipient. The presence of Fake Money, money that isn’t earned by adding value to the economy, devalues the Real Money. The amount of money in the economy may be the same, but the amount of value produced is down. Because there is more money, and less products, the money is worth less.
The second instance of Real Money vs. Fake Money has to do with what I said to ignore above. Inflation. If we assumed that the supply of money never changed, as more people enter the economy and add value to it, the demand for the money increases. So the purchasing power of the dollar rises. This is called deflation. (And personally I’m not convinced that it is a bad thing).
What governments with fiat systems should try to do is to increase the supply of money (remember that it’s just paper and nothing more) at the same rate as the increase in demand. This would lead to neither inflation, or deflation. However the vast majority of the time governments print out more money than the increasing demand. Thus the demand increases, but the supply increases more, and we have Inflation. The purchasing power of the dollar is decreased. The rough average is 5% inflation, give or take.
This is, in itself, a creation of Fake Money. By taking money that no one earned and just spending it on the economy, or loaning it out at 0% interest, you have the same issue as you had above. You have one guy who earned $400 go out and try to buy something while another guy shows up with $400 that still has wet ink. Bad things happen to the guy who earned his money when suddenly there is twice as much money to purchase something. But this example is assuming 100% inflation.
What is the inflation right now, you’re probably asking. According to the Bureau of Labor Statistics, the CPI right now is about 2%. And it has been 2% each of the past couple of years. Not bad, right? Except that the BLS doesn’t include Food Prices, Energy Prices and Housing Prices in their calculation of inflation. Since the 3 largest fluctuating items are Food Prices, Energy Prices, and Housing Prices, it is utterly clear that the government is cooking the books to make things appear much better than they are.
So let’s take a try at calculating the Fake Money ourselves. As it stands, there is $2.5 trillion in paper bills floating around in the economy. If you count the money in banks (who take the money, hang onto 10% and loan the rest out) there is about $10.6 trillion in money value in the economy. The problem is that for the past several years the Federal Reserve (who actually owns and prints our money) has been making $0.2 trillion of Fake Money every month, and loaning it out at 0% interest. So we have $2.40 Trillion in Fake Money created every year, against $10.6 trillion of money value.
This puts the real inflation at 23%. Yup, 23%. Not 2%. 23%. With 23% inflation, the value of the money you put in the bank account 3 years ago is now practically cut in half. The real money you earned had its value cut in half in 3 years because of fake money.
Again, thanks for reading! Now before everyone jumps all over me, I am spectacularly aware that it is not that simple as I described. Often times I exhaggerated the situation (like with 100% inflation), or I ignored how complex a situation is. For example, even with 23% inflation, people haven’t felt most of the pain of the fake money. Yet. There is a big question as to where it is going, and that could be a huge post in and of itself.