A little more than nine years ago, we published here a list of the top five errors made about bitcoin. That post received some attention and so we tried again later. You might ask, what are the most common errors we make in our discussions of fiat currency? Thanks for asking! Without further ado:
1... "Every Dollar is Created as Debt"
Like most inaccuracies we make, there is some basis in truth. Very often, newly created dollars are then loaned out, usually to banks who then loan them out at higher interest rate (higher than they are paying) to people getting mortgages or other loans. However, we are missing a step here when we report the issuance of a dollar as the creation of debt. The dollar is issued, and then it is loaned out. The creation of a FED token is not an implicit creation of debt, but rather that that the token is loaned out after issuance. Is this important? Well yes.
Do we know for certain that every dollar is loaned out immediately after issuance? Of course we don't, as nothing is public in the fiat system - the issuance and the loan can both be done in private, behind closed doors. If we could prove that every single dollar, using some public registry or something, was then loaned out - then we could say this. Could it be however that just one new dollar was at one point added to a bank account somewhere, and no loan was created? Or maybe a single paper note was printed and somebody took it without taking on a debt? It could be. And so, we are being inaccurate when we don't acknowledge this possibility.
Many folks go through the machinations of pointing out that there won't be enough dollars to pay off the debt, because if "every dollar" is issued as debt with interest, then indeed there aren't ever enough to pay back all the debts. Sure, this could be a real problem, but also it means we aren't understanding the system. Dollars could be issued without debt, in fact every one starts its life as such. Understanding this will help to understand the phenomenon of negative interest rates.
2... "The strength of the dollar makes the USA strong"
Yeah, well, not so much, but again there is some truth to it. This is true for certain values of "the USA". If by "the USA" we mean the issuers of the dollar, and those who are supported by the issuers, then yes - the strength of the dollar makes those issuers strong. However, there is more to the USA than just the issuers of currency. There are citizens, institutions, natural resources, and more.
The point of a fiat currency is, as Marco Polo put it , to make the issuers "have more treasure than all the kings of the world". "Nearly all the valuables in the country come into the [issuer's] possession." If the issuers are collecting all the treasures, then who is losing them? Well, the users of the currency are the losers of this game. In the case of the USA, the citizens of the USA are made poor by the fiat currency system, as predicted by Thomas Jefferson when he did or didn't say the famous quote below. Even if the quote is a paraphrase, it does appear to line up with his other thoughts on the topic.
The political power of seignorage was one of the deciding factors in necessitating the American Revolution, as the founders wanted to escape the ability of the king to confiscate their wealth. There is no question that the seignorage enabled by the post 1971 fiat currency system is a far greater hindrance to the independence and freedom of Americans than that wielded by the 18th century British crown.
The point is, the collapse of the fiat dollar when it finally comes will be something for all Americans to celebrate.
3... "It's the FED's fault"
Sure, in the sense that if I leave the steaks on a low table in the yard with the dog, and the dog eats the steaks, it is the dog's fault that the steaks are gone. The dog ate them after all, it's his fault!
But wait, is there somebody else who maybe could have avoided the loss of the steaks? Yes, I could have perhaps not left them on that low table. Don't you think?
I know you're not going to like this, but the people we should blame for inflation and homelessnes are ourselves, as we agreed to accept the privately issued tokens as money. One could in fact make an argument that the issuers have done a great job, compared to many other issuers, in leaving a few scraps on the table. The issuers of the currency are simply doing their job: to inflate (to issue currency). It hardly makes sense to blame them for doing their job. The real burden of guilt for the inflationary economy is squarely on the shoulders of those who agreed to use inflationary currency.
4... "All this was built with fiat currency, look how much good it has done"
Look at the improvements of living standards in the last century. Look at the Hubble Telescope and the James Webb Telescope. All this was done with fiat currency. Doesn't that mean fiat has done a great job?
Well most certainly it does not mean that. Does the fact that Lance Armstrong had cancer mean that cancer is really good for biking? It doesn't mean that either.
It's a simple question of correlation and causation. Many folks like to claim that communism, or capitalism, or fiat, or something else has been so successful because of this or that improvement in the world during the time that the system was in place. Usually the improvement mentioned is actually due to technological and infrastructure improvements; never is it due to the system credited.
When we look out over the city skyline, the radio telescopes, or whatever it is we are impressed by, we should not be thinking that it wouldn't have been possible without a counterfeitable currency system. Instead we should think how much better it would have been if the builders hadn't been economically bled out by a parasitic class.
5... "The money supply grew by 80% in the last year"
We like to comment on the money supply of fiat currency as if we knew something about it. For example, here's a pretty plot from some economists in St. Louis:
Look at that, now we know the money supply, eh? 21.1835 trillion dollars, on the button. Sometimes we say things like "80 billion new dollars are issued every month".
The trouble is, we can't verify these numbers. Fiat currencies are issued privately, and there's no way to know for sure how many were issued. All we can do is watch the markets and see what happens as the issuers buy up the world's valuables. How much gold and bitcoin and real estate will they buy this month? There's no way to know, so probably we shouldn't pretend to know.
Maybe less cash was printed last year than estimated. Maybe more cash was printed. Which one was it? And which estimate should we pay attention to?
Honorable Mention: "We Have to Accept them by Law"
This one just isn't true. Legal tender laws mean you must accept the legal tender in the case of a dispute in which you are a creditor. If you are running a business or working, you are free to demand any compensation you choose. Chuck-E-Cheese tokens only please!