Fiat Failures
Why blockchain already provides the solution fiat can’t.
Fiat Follies
Imagine this. On Monday, you go to your favorite fast food joint and order a burger, fries, and a Coke for $20. You come back on Friday and the same meal costs $320. That is hyperinflation, and it happens when politicians overprint money to cover endless government spending. Savings become meaningless, and money must be spent immediately. The economy breaks down.
This scenario is not an exaggeration. At the height of Zimbabwe’s hyperinflation, prices doubled every single day. People did everything they could to escape their collapsing currency, rushing to buy goods like bag of cement before they doubled in price again. 1 When fiat money fails, it fails hard.
In the last twenty years, more than 50 million people have lived through hyperinflation. Three countries in particular, Venezuela, Zimbabwe, and Lebanon, stand out as recent examples of these “fiat follies.” Over the past century, the world has seen at least 56 official hyperinflation events, meaning that roughly one third of all nations have watched their currencies collapse within the last hundred years. 2 To most people in the United States, hyperinflation sounds absurd, but history shows it is surprisingly common.
Hyperinflation Causes
What causes hyperinflation? Why did prices rapidly rise in countries like Zimbabwe, Venezuela and Lebanon? Let’s take a look.
Zimbabwe. 3 The Zimbabwean government made a series of mistakes that destroyed jobs, goods, and services, including land seizures and strict price controls. It also printed excessive amounts of money to pay for a war and to cover government salaries. As a result, production collapsed while the money supply exploded. The government tried to fix the problem with more price controls, but this only worsened shortages and expanded the black market. As prices soared, people lost faith in the currency and demanded higher wages, which accelerated the spiral of hyperinflation. By the end, prices doubled daily and people carried money in trash bags just to buy bread.
Venezuela. 4 Venezuela is a petrostate that depends heavily on its vast oil reserves for both its economy and government revenue. When oil prices collapsed from around $100 to $30 per barrel, the government scrambled to cover its growing deficits. To stay afloat, it printed large amounts of its currency, the bolívar, which flooded the economy with excess money. At the same time, President Nicolás Maduro’s regime cracked down on dissent and committed widespread human rights abuses, leading to severe international sanctions, including from the United States. The combination of money printing, falling oil revenue, and political isolation drove the country into one of the worst hyperinflations in modern history.
Lebanon. 5 Lebanon’s corrupt and heavily indebted government relied for years on borrowing to fund public jobs and subsidies. To maintain a fixed exchange rate between the Lebanese pound and the U.S. dollar, the central bank offered extremely high interest rates to attract foreign deposits, a system economists later described as a Ponzi-like scheme. When confidence collapsed and foreign reserves ran dry, the currency plummeted in value. By mid-2020, inflation had exceeded 50 percent per month for more than 30 days, marking Lebanon’s entry into official hyperinflation. As prices exploded, the Lebanese pound lost more than 90 percent of its value, and ordinary citizens rushed to use U.S. dollars and even crypto to survive.
What They All Have In Common
All three were caused by government overspending and out-of-control debt that led to desperation and money printing. When inflation sets in, it’s popular to blame big business or wealthy leaders for rising prices, but inflation always comes from reckless government spending. Since 2019, the U.S. dollar has lost about 25% of its purchasing power, and the phrase “eat the rich” has become popular. But it’s not the rich who cause currency to lose value. For that, you must look at your government.
Fiat currency is popular because it gives political leaders more control over the economy and allows them to fund social programs that claim to help the poor. But this system depends on responsible and benevolent leadership to manage the currency wisely. Just because you have a good leader today doesn’t mean you will tomorrow.
I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will. Warren Buffet
This quote applies not only to business but also to government. We should design our monetary systems so that even an idiot can’t destroy them. Fiat currency gives political leaders many ways to manipulate their economies, but it also gives them enough rope to hang themselves, and eventually, they do.
The Solution
The answer is simple: a return to sound money. No more fiat currency. No more printing at will. Many believe the solution is gold, but I believe it’s Bitcoin. If you want to know why, read my earlier articles on Bitcoin versus gold. In the meantime, always bet against your country’s currency by owning things with value: hard metals, digital assets, and fine art.
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Final Word
Thank you for tuning in this week.
“If you find yourself in a hole, stop digging.”
— Will Rogers
DISCLAIMER: This article is for informational and educational purposes only and should not be construed as financial, investment, tax, or legal advice. The author is not a licensed financial advisor, and nothing in this article constitutes a recommendation to buy, sell, or hold any cryptocurrency, gold, or other asset. Cryptocurrency investments are highly volatile and risky, and you could lose all of your invested capital. Past performance does not guarantee future results. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions. The author operates a paid cryptocurrency education course and may hold positions in assets discussed.
https://www.theguardian.com/world/2007/jul/05/zimbabwe.topstories3?
https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table.pdf?
https://www.economicshelp.org/blog/390/inflation/hyper-inflation-in-zimbabwe/?
https://www.cfr.org/backgrounder/venezuela-crisis?
https://www.nasdaq.com/articles/inside-lebanons-currency-crisis-how-hyperinflation-feels?