Fiat currencies are those emitted by central banks and controlled by governments all over the world. These currencies are meant to deceive the people in a very subtle way.

The Savings Strategy

In order to keep things simple, we are going to use as an example a worker, that is saving \(\$1000\) per month in fiat currency. The worker’s strategy is known as dollar cost averaging, which basically consist on saving every month the same amount of money, for a period of time, let’s say, 10 years.

Over these 10 years, assuming we save the same amount of money every month the calculation of the total savings would look like this:

$$TotalSavings=MonthlySaving\times Months\times Years$$ $$TotalSavings=1000\times12\times10=120000$$

As we can see, saving \(\$1000\) a month for ten years equals a total of \(\$120000\), which is a pretty good number.

The Compound Interest

To understand the fiat scam scheme we have to understand a classic concept of economics: the compound interest. The compound interest is something that usually happens whe you invest your money. This basically means that the money you invest will return you a profit that you can re-invest, and get a profit from that profit, “profit-ception”.

The same applies to losses. Compound losses, end up returning you losses, on your losses. If lose \(10\%\) on your capital, you re-invest, and you lose again \(10\%\), you would have lost \((1-{0.9}^{2})\times100\% = 19\%\) of your capital.

Saving in Fiat is a Bad Investment

When you save your money in fiat currency, you’re investing in fiat, you’re putting your money in something you consider it’ll retain or increase it’s value over time.

Saving in fiat is actually a very bad investment, since fiat seldomly has positive returns, you’re stuck with consistent compound losses over time.

Let’s try a math experiment with the compound losses, imagine you do the same as the aforementioned experiment, saving \(\$1000\) per month over a period of 10 years.

The mathematical expression for compound interest would look like this:

$$IR = \frac{100\% \pm YearlyReturn\%}{100\%}$$ $$TotalReturn(IR) = \sum_{y=1}^{Years}{MonthlySavings\times12\times IR^y}$$

So, having these expressions let’s calculate the total return for a 10 year period with no inflation with our \(\$1000\) monthly investment.

$$IR = \frac{100\% + 0\%}{100\%} = 1$$ $$TotalReturn(1) = \sum_{y=1}^{10}{1000\times12\times 1^y} = 120000$$

Great! as our original calculation, our interest rate in a stable currency with \(0\%\) inflation rate is \(\$120000\).

Now let’s do the experiment with a slight profits on the yearly return, let’s say \(\%5\) annually.

$$IR = \frac{100\% + 5\%}{100\%} = 1.05$$ $$TotalReturn(1.05) = 158481.45$$

Wow! now we are talking, with just a small interest rate of \(\%5\) annually we get an extra return of \(\$38481.45\) in the 10 years of investment.

But what about inflation? What happens if the inflation is \(\%5\) annually? How would that affect our savings? Let’s calculate it, inflation of \(\%5\) is basically a negative interest rate of \(\%5\).

$$IR = \frac{100\% - 5\%}{100\%} = 0.95$$ $$TotalReturn(0.95) = 91487.98$$

Oh no! now we have diminished returns, what’s worst, we have lost money. On our original investment of \(\$120000\) we have lost \(\$28512.02\), that’s really bad.

Notice, we are using \(\%5\) as the inflation interest rate, since it’s close to the average global inflation. Some countries have very high double-digit inflation rates while some others, have negative inflation.

Of course the numbers are subjected to a lot of different factors we are not calculating here that would move the needle to one side or the other. But the point of this article is not to argue if investing in bonds might save you from that inflation rate, or if buying blue chip stocks can help you make a good profit.

The whole point of this reasoning is to prove that the fiat system is indeed a scam, that slowly dilutes the value of your money.

This kind of scam scheme, that I like to call the fiat scam scheme is especially bad on the lower income population, that do not have the means of investing their money in safer places.

The 0% Inflation Rate Fallacy

There’s an interesting fallacy I would like to talk about, that is way less evident. The fallacy is the one that says that a \(\%0\) inflation rate does not diminish your purchasing power.

As you know, in modern times, economies grow, most of the time all over the world. This means that over time, the amount of goods and services in a given economy increases.

So now let’s think about it for a moment: If the amount of goods and services on the economy increases at a rate, doesn’t it make sense, that the amount of goods and services you can purchase, increase at the same rate?

Well, in a fiat system that’s not the case. Because when you get \(\%0\) inflation rate, that’s still suspiciously high. In a growing economy, it would be fair that inflation rate becomes negative. Why? Because the more goods and services there are available, the more your money should be able to buy.

So in a growing economy, \(\%0\) inflation rate is still a scam, because workers are making up an economy, providing ever growing goods and services, but are not participating on the benefits of such growth.

The solution: A hard currency

The definition of a hard currency is simple: A currency that has a fixed supply, forever.
Why is it important to have a hard currency? Because the workers that are growing the economy will have a fixed coin value, a fixed relative point, if economy grows, the fixed value can purchase more, if the economy shrinks, then the fixed value will have diminished purchasing power.

Naturally, since expansions and shrinks are constantly happening, maybe because of a growth factor like a sound economy, or a shrink factor like a war or a pandemic, the hard currency will be subjected to volatility. This is (kind of) an actual measure of the real economy.

Of course, nobody likes volatility, and here’s where fiat currency shines, since supply and demand are centrally controlled, then we can keep a fixed inflation rate, or a socially acceptable one, that would make the system of prices, predictable and easy to use. That makes a good point and use for fiat currencies.

But for the real economy, for the people wanting to save money for the future, the currency of choice should be any other hard currency, not subject to the manipulation of the fiat system, maybe that hard currency is blue-chip stocks, maybe it’s Bitcoin, but fiat? I doubt so.