“If printing money could end poverty, printing diplomas could end stupidity.” - Javier Milei
Money has a very simple, but critical role in our lives.
A moneyless world is one of barter. You make something and then need to find someone that values that thing and can give you something you value - all at the same time. Good luck!
Money changed all that. Suddenly you could specialize in what you are good at making, sell whatever you didn’t need and hold the fruits of your labor in money to get whatever you wanted, from whoever you wanted, whenever you wanted. We take it for granted but this simple trick - to save your work into a token for future goods - is perhaps the most foundational innovation of them all. Specialization and trade made us prosperous, but it was not possible without money.
There is one critical requirement of money to work: it has to hold its value. That’s its role! You want to be paid for your work and then transport that value to the future. You make something and get a coin. You can buy many things for that coin. But if you could only buy half as much in a month…well, the money is not very valuable. It completely loses its core function.
How does money keep its value? It remains scarce. If an economy makes 100 things and has 100 coins, but one person can just print more coins…well, you are obviously going to have a big problem. More money does not mean more wealth, only more production can add to real wealth.
And this is why over centuries, the world settled on gold as its core money. After failing with shells, beads and salt, the world realized gold is reliably scarce. There is a decent amount of gold in the world but finding more is hard. Yes, gold miners do find new stores, but except for a few years in history, the discoveries are small and the supply remains close to fixed (usually growing 2% or so per year).
However, as modern nations developed they realized gold had a few problems. It is heavy. It can’t easily be divided. And it takes expertise to ensure its purity. Therefore, modern money was born. A nation would take gold and turn it into bills that represented the gold they held. The system of trade started moving even faster. And prosperity followed.
As time went on, political leaders started to ask serious questions about this system. Do we really need the gold to print more money? What if we issue a few more dollars for each ounce of gold we have? And the “fiat” system of money was born. From the Roman Empire to modern American presidents this temptation has been irresistible. After all, a large system will not notice a little printing - and it is easier than raising taxes!
But, predictably, a small habit turns into a big one.
Since 2008, the US has printed dollars* with reckless abandon to help cover financial crises, wars, social programs - and, of course, the pandemic. In fact roughly 40% of all dollars in existence have been created since COVID.
Like a law of physics, this printing has created numerous problems.
The most obvious is inflation. The truth is over time, money should buy MORE, not less. Why? Well, we invent new ways to make things with less effort. If more is produced with the same money, you can buy more with each unit. This is not our system. We have become addicted to inflation. Small in most years, large in others. And the printing sits at the center of it.
If you want to understand the turmoil and political chaos of the world today, this money problem is a great place to look. Let’s count (just a few of) the ways reckless printing causes issues:
Inflation hurts the poor. Poor people rely on wages to live. Wage levels are sticky, but goods and services change prices quickly (notice your restaurant bill going up faster than your salary?). You get paid about the same, but need more to keep life going.
Inflation helps the rich. As official currency loses value, assets start to act like money. Things that hold value - fine art, houses in good neighborhoods, blue chip stocks, gold(!) - start to appreciate. Yes, the rich have to pay more to live as well, but their assets increase in value - usually faster.
Money printing drives corruption. When the government prints (and then directs) so much money, those that get it first get extra value. It takes time for the market to recognize increases in money supply, so if you are given money first, you can realize quick gains. This simple fact means the government moves markets - and people will fight to get more influence over it.
Fiat printing makes saving impossible and speculation rampant. If you can’t rely on the future value of your earnings in a currency that preserves value then you need to invest any savings you have to keep up. This requirement drives poor capital allocation in the form of speculative bubbles, scams and a feverish pursuit of the quick buck.
Devaluing the currency makes (American) enemies. The dollar system runs the world - and most countries produce products and services to earn dollars. But, as we print more, the US gets the gains in purchasing power, while the rest of the world only gets the long term inflation. The results are currency wars, trade wars and constant debates around the long term use of the dollar.
The list could go on and on.
Don’t believe money printing makes much of a difference?
Well take a look at housing prices over the last 30 years in two currencies: dollars and gold.
We all know housing prices have gone through the roof. But, you can quickly see that if we had a truly gold based system (hard money), there would have been no rise in prices - over 30 years. In fact the price for a typical home in gold is slightly less over that time. So if you had saved 50 ounces of gold 30 years ago you would have slightly more purchasing power today. If you had saved $100k in cash, you would have lost almost 80% of your purchasing power. One is true money - one is not.
If you own assets, you have benefited greatly from this economic model. Anyone with real assets has looked like a genius over the last few decades. But, over time, the model flat out does not work. Inequality grows, corruption expands, capital is misallocated, trade wars break out and social cohesion erodes. Sound familiar?
This dynamic can’t run forever. We will reset. And getting money to work again is a big part of what needs to happen. We won’t return to gold, but money needs to regain more of its core saving power.
Sadly, large wars or revolutions have historically driven the reset in these situations (the 1860s and 1930s, for example). But other options surely exist. A decade of spending discipline and moderate inflation could normalize things (1950s). A massive productivity boom from AI or other innovations could also drive the growth needed to keep up with our printing. But, in almost every scenario, very hard choices are inevitable. Will anyone muster the real courage to make them before we hit a real crisis? For now, its seems the answer is no.
Good Links
*Money isn’t really “printed” - it is created with the click of a button and backed by debt of some sort. You can read the wonky details but the effect is the same as simply printing.
The only real way to create wealth is to make more with less (archive post).
Argentina has faced the monetary crisis and reset - and Javier Milei seems to be making the right (but very hard calls).
More spending, more debt, more currency debasement. Higher interest rates are just the start.
Trade wars are currency wars. Tariffs surely won’t get us out of this mess.
Inspector Clouseau protects the money (RIP to Blake Edwards):