Peak Fiat: The Cultural and Economic Decline Through Centralized Monetary Control
Introduction
The concept of “peak fiat” has gained traction among Bitcoin proponents and Austrian economists as a framework to explain the distortional effects of centralized monetary control on free markets and society at large.
When the money supply expands disproportionally over extended periods, money loses its value. As a result, individuals, businesses and governments adapt short-term thinking and decision-making.
Instead of creating things that last hundreds of years, the economy is turned into a “high velocity trash economy”.
Here are some examples:
The Economic Theory of “Peak Fiat”
The Austrian School of Economics provides the theoretical framework for the critique of fiat monetary systems.
Friedrich Hayek’s work on the denationalization of money argues for removing governmental control over currency to end central bank monopolies.
This aligns with Bitcoin’s decentralized nature, which aims to create a monetary system free from governmental or institutional control.
The Fiat Standard and Its Origins
The fiat standard, which replaced the gold standard, originated in 1915 when the Bank of England suspended gold convertibility. This shift marked the beginning of an era where currency value was no longer tied to a physical commodity but instead “backed” by government decree.
Distortions in the Free Market
Monetary Inflation and Its Consequences
Central banks’ ability to manipulate the money supply leads to monetary inflation, which has far-reaching consequences:
- Instant gratification: People lose the capability to work on hard problems for extended periods
- Obesity: The abundance of cheap, processed foods, partly due to agricultural subsidies enabled by inflationary monetary policies, contributes to rising obesity rates.
- Planned Obsolescence: In an inflationary environment, companies are incentivized to produce goods with shorter lifespans, encouraging frequent replacements and boosting short-term profits.
- Shrinkflation: As the purchasing power of fiat currencies declines, manufacturers often reduce product sizes or quality while maintaining prices, effectively hiding inflation from consumers.
- Cultural Decline: The shift towards higher time preference in an inflationary environment contributes to a decline in long-term cultural investments and preservation efforts.
- Decline of safety: Social decline results in lowered safety. In Panama the Mayor proudly presents McDonald’s sponsored plastic sewers that are cheaper and won’t get stolen.
Economic Calculation Problem
The centralized control of money exacerbates the economic calculation problem identified by Austrian economists. This problem arises when price signals are distorted, leading to misallocation of resources and inefficiencies in the market.
Asset Bubbles and Malinvestment
The ability of central banks to manipulate interest rates and money supply can lead to the formation of asset bubbles and encourage malinvestment. This was evident in the 2008 financial crisis, where artificially low interest rates contributed to a housing bubble.
Bitcoin as an Alternative
Bitcoin presents itself as an alternative to the fiat standard, offering several key innovations:
- Fixed Supply Schedule: Bitcoin’s capped supply of 21 million coins provides a predictable inflation rate, contrasting sharply with the discretionary monetary policies of central banks.
- Decentralized Consensus: The proof-of-work mechanism ensures that no single entity can control the monetary policy, aligning with Hayek’s vision of denationalized money.
- Borderless Transactions: Bitcoin enables global, permissionless transactions, reducing friction in international trade and potentially fostering a more integrated global economy.
- Separation of Money Creation from Lending: This feature could lead to a more stable financial system by reducing the risks associated with fractional reserve banking.
Potential Impacts of Bitcoin Adoption
The increasing adoption of Bitcoin could have profound effects on the global financial system and broader society:
- Return to Sound Money Principles: A Bitcoin-based system could reduce monetary inflation and encourage long-term economic thinking.
- Full-Reserve Banking: The adoption of Bitcoin could lead to a return to full-reserve banking, potentially reducing systemic financial risks.
- Emphasis on Equity Financing: A Bitcoin standard might shift the focus from debt to equity financing, potentially leading to more stable economic structures.
- Reduction in Government Deficit Financing: The inability to inflate the money supply could constrain governments’ ability to finance deficits through monetary expansion.
Empirical Evidence and Case Studies
Venezuela: Hyperinflation and Societal Collapse
Venezuela provides a stark example of the consequences of extreme monetary mismanagement. The country’s hyperinflation, reaching 65,374% in 2018, led to widespread poverty, food shortages, and societal breakdown. This case illustrates the potential end-game of unchecked fiat currency manipulation.
Japan: Decades of Stagnation
Japan’s experience since the 1990s demonstrates the limitations of central bank interventions. Despite near-zero interest rates and massive quantitative easing programs, the country has struggled with high debt and low growth, challenging the efficacy of traditional monetary policy tools.
Conclusion
The concept of “peak fiat” provides a framework for understanding the distortional effects of centralized monetary control on free markets and society. At core, fiat money changes the time preference in society, leading to short-term thinking.
To restore a low time preference environment, humanity would need to upgrade the monetary system to a hard money standard.