How does inflation make "poverty" a original sin?

Written by: Knut Svanholm

Compiled by: AididiaoJP, Foresight News

Original Title: The Original Sin of Poverty

Currency is the core of the market, facilitating trade and economic accounting. Its value, that is, purchasing power, can be eroded by inflation, which benefits the wealthy while sacrificing the interests of savers.

When it comes to the operation of a free market, nothing is more important than currency. Currency constitutes every transaction and represents the embodiment of all value in the exchange of goods and services. But what is the price of currency?

The goods with the highest liquidity in the market often become the socially preferred medium of exchange, that is, currency. Prices denominated in this universal medium make economic accounting easier, thus allowing entrepreneurs to discover opportunities, gain profits, and promote the progress of civilization.

We have understood how supply and demand determine the price of goods, but determining the price of currency is more complex. Our dilemma is that since prices are already expressed in currency, we lack a unit of account to measure the price of currency. Since it cannot be explained in monetary terms, we must find alternative ways to express the purchasing power of currency.

The basis for people buying and selling currency (exchanging goods and services for currency) is the expectation of the future purchasing power of that currency. As we know, individuals always make choices at the margin, which gives rise to the law of diminishing marginal utility. In other words, all actions stem from value judgments, and the actor makes choices between the most urgent goals and the next best desires. The law of diminishing marginal utility applies here as well: the more of a certain good a person has, the weaker the satisfaction derived from each additional unit becomes.

Currency is no exception. Its value lies in the additional satisfaction it can provide, whether for purchasing food, security, or future choices. When people exchange labor for currency, the only reason is that they value the purchasing power of the currency more than the immediate utility of their time. Therefore, the cost of exchanging currency is the highest utility that an individual forgoes from cash. If someone works for an hour to exchange for a ribeye steak, they must believe that the value of this meal is greater than the value of one hour of leisure.

The law of diminishing marginal utility indicates that the desire satisfied by each additional unit of a homogeneous good will gradually decrease, and thus the individual’s valuation of the additional unit also declines accordingly. However, the definition of “homogeneous goods” entirely depends on the individual. Since value is subjective, the utility of each additional unit of currency depends on personal goals. For someone who only wants to use money to buy hot dogs, “one unit of currency” is equivalent to the price of one hot dog. Only when he has enough cash to buy the next hot dog does he consider that he has increased the unit of this homogeneous good known as “hot dog-specific currency.”

This is precisely the reason why Robinson Crusoe faced a pile of gold yet remained indifferent to it: gold cannot be exchanged for food, tools, or shelter. Currency in isolation is meaningless. Like all languages, it requires at least two participants to function; currency is essentially a tool for communication.

The Illusion of Inflation and Idle Currency

People choose to save, consume, or invest based on their time preferences and expectations of the future value of money. If they expect purchasing power to rise, they will save; if they expect it to fall, they will consume. Investors make similar judgments and often shift their funds to assets they believe will outpace inflation. However, whether saving or investing, money always serves its holder. Even “waiting funds” have a clear mission: to reduce uncertainty. Those who hold onto their money without spending are fulfilling their desire for flexibility and security.

Therefore, the concept of “circulating currency” is misleading. Currency does not flow like a river; it is always held, owned, and utilized by someone. Exchange is an action, and actions occur at specific points in time. Thus, there is no such thing as “idle currency” in the world.

If a currency detaches from its historical price correlation, it will lose its anchor, and individual economic accounting will become impossible. If a loaf of bread sold for 1 dollar last year and rises to 1.1 dollars this year, we can infer the direction of the change in purchasing power. Accumulating such observations over the long term forms the basis of economic expectations. The CPI (Consumer Price Index) provided by the government is the official version of this type of analysis.

The index attempts to reflect the “inflation rate” through a fixed basket of goods, deliberately ignoring high-value assets such as real estate, stocks, and artworks. Why is that? Because including them would reveal the truth that those in power are desperately trying to cover up: the pervasiveness of inflation far exceeds the level they acknowledge. Measuring inflation through the CPI essentially conceals an obvious truth: price increases will ultimately be proportional to the expansion of the money supply. The creation of new money always leads to a decrease in its purchasing power relative to what it could have been.

The rise in prices is not caused by greedy producers or supply chain failures; its root ultimately lies in monetary expansion, with an increase in the money supply leading to a decline in purchasing power. The groups closest to the source of money (banks, asset holders, and politically connected enterprises) benefit, while the poor and the working class bear the brunt of rising prices.

This impact is lagging and difficult to trace directly, which is why inflation is often referred to as the most insidious form of theft. It destroys savings, exacerbates inequality, and amplifies financial turmoil. Ironically, even the rich fare better under a sound monetary system. In the long run, inflation harms everyone, including those groups that may seem to benefit in the short term.

The Origin of Currency

If the value of a currency is derived from its purchasing power, and this value is always judged by historical prices, how did currency originally acquire value? To answer this question, we must trace back to the economy of barter.

A commodity that evolves into currency must inherently possess non-monetary value before it becomes currency. Its purchasing power is initially determined by demand for other uses. When it begins to assume a second function (medium of exchange), demand and price rise in tandem. From then on, the commodity provides dual value to the holder: utility value and medium of exchange function. Over time, the demand for the latter often exceeds that of the former.

This is the core of the Mises Regression Theorem, which explains how money arises from the market and always remains connected to historical valuations. Money is not a state invention, but a spontaneous product of voluntary trade.

Gold became a currency because it meets the criteria of a good currency: durability, divisibility, recognizability, portability, and scarcity. Its use in jewelry and industry still endows it with utility value today. For centuries, paper currency was merely a certificate for the exchange of gold. Lightweight paper currency perfectly solved the transportation problem of gold. Unfortunately, issuers of certificates soon realized they could overissue paper currency, a practice that continues to this day.

When the connection between paper money and gold is completely severed, governments and central banks can create currency out of thin air, leading to the current unanchored fiat currency system. Under the fiat currency system, politically connected banks can be rescued even if they go bankrupt, resulting in moral hazard, distorted risk signals, and systemic instability, all of which are realized through the silent plunder of savings via inflation.

The temporal relationship between currency and historical prices is crucial for market processes. Without it, personal economic accounting would be impossible. The currency regression theorem mentioned earlier is a behavioral insight often overlooked in discussions about currency. It proves that money is by no means a fictional product of bureaucratic illusion, but is genuinely connected to the primal desire for “means of exchange for specific purposes” in a free market.

Currency is a product of voluntary exchange, not a political invention, collective illusion, or social contract. Any commodity with a limited supply that meets the basic requirements of a medium of exchange can become currency. Items that possess durability, portability, divisibility, uniformity, and universal acceptability can all qualify.

Imagine if the “Mona Lisa” could be infinitely divided, its fragments could become currency, provided there is an easy way to verify their authenticity. Speaking of the “Mona Lisa,” anecdotes about famous 20th-century painters perfectly illustrate how the increase in the supply of monetary goods affects their perceived value. These artists realized they could leverage their celebrity status to become wealthy through their signatures. They found that the signature itself had value, to the point where it could pay for a meal. It is said that Salvador Dalí once signed a wrecked car, instantly turning it into a precious piece of art. However, as the number of signed bills, posters, and car wrecks increased, the value of newly added signatures continuously diminished, which is a perfect example of the law of diminishing marginal utility. An increase in quantity leads to a depreciation in quality.

The largest Ponzi scheme in the world

Fiat currency follows the same logic. An increase in the money supply dilutes the value of existing units. Early recipients of new money benefit, while others suffer. Inflation is not just a technical issue, but also a moral one. It distorts economic accounting, rewarding debt rather than savings, and plundering the most defenseless groups. In this regard, fiat currency can be seen as the largest Ponzi scheme in the world, nourishing the top at the expense of the bottom.

We accept defective currency only because it has been inherited, and not because it is optimal. But when enough people realize that sound money (currency that cannot be counterfeited) is more beneficial to the market and humanity, we may stop accepting the hollow gold certificates that cannot feed us, and instead build a world of real, honest value that is obtained through strength.

Sound money originates from voluntary choice rather than political decree. Any item that meets the basic requirements of money can serve as currency, but only sound money can ensure the long-term prosperity of civilization. Money is not only an economic tool but also a moral institution. When money is corrupted, everything downstream – savings, price signals, incentives, and trust – becomes distorted. However, when money is honest and trustworthy, the market can coordinate production, indicate scarcity, reward frugality, and protect vulnerable groups.

Ultimately, currency is not just a means of exchange, but also a guardian of time, a record of trust, and the most universal language of human cooperation. Corrupting currency destroys not only the economy but also civilization itself.

“Human beings are short-sighted creatures, only able to see the small area in front of them. Just as passion is not a good friend, specific emotions often lead to malicious schemes.”

Counterfeiting: Modern Currency and the Illusion of Fiat Money

We delve into the operational mechanisms of modern currency. You may have heard of negative interest rates and wondered how they coexist with the fundamental principle of “time preference always being positive.” Perhaps you have also noticed the rising prices of consumer goods, while the media points fingers at everything outside of currency expansion.

The truth about modern currency is hard to accept, as once the scale of the problem is recognized, the prospects appear bleak. Humanity finds it difficult to restrain the impulse to exploit others through printing money. The only solution seems to be to exclude humanity from this process, or at least to achieve a separation between currency and state power. Nobel laureate Friedrich Hayek believed that this could only be accomplished through “some sort of roundabout clever way.”

The UK was the first country to weaken the link between its currency and gold. Before World War I, almost all currencies were redeemable for gold, a standard that had developed over thousands of years, stemming from gold being the most liquid commodity on Earth. However, in 1971, when US President Richard Nixon announced the “temporary suspension of the dollar’s convertibility into gold” and unilaterally severed the last link between the two, convertibility was completely abandoned. His move was to fund the Vietnam War and maintain political power.

We need not go into all the details of fiat currency, but the key point is this: the currency issued by today’s governments has no physical backing and is created entirely as debt. Fiat currency disguises itself as money, but unlike true money (which arises from voluntary exchange), it is a tool of debt and control.

Every new dollar, euro, or renminbi is born from loans issued by big banks. This money must be repaid with both principal and interest. Since interest is never created in sync with the principal, the currency in circulation is always insufficient to pay off all debts. In fact, the system requires more debt to survive. Modern central banks also manipulate the money supply through measures like bailouts (preventing inefficient banks from failing) and quantitative easing (adding fuel to the fire).

Quantitative easing is the act of a central bank creating new money to purchase government bonds, essentially exchanging white slips for newly printed banknotes. Bonds are the government’s promise to repay loans with interest, backed by the state’s power to tax current and future citizens. The result is a continuous and covert extraction of wealth from producers through inflation and debt servitude.

Currency printing continues under the banner of Keynesian economics, a doctrine that supports most modern government policies. Keynesians claim that spending drives the economy forward, and if the private sector stops spending, the government must take over. They assert that every dollar spent creates a dollar’s worth of value for the economy, while ignoring the reality of value dilution caused by inflation. This is merely a repeat of Bastiat’s “broken window fallacy.” Increasing the number of zeros does not create any value.

If printing money could truly increase wealth, we should all have a super yacht by now. Wealth comes from production, planning, and voluntary exchange, not from the numerical games on a central bank’s balance sheet. Real progress comes from people accumulating capital, delaying gratification, investing in the future, and exchanging with others and their future selves.

The Ultimate Destination of Fiat Currency

Increasing the issuance of currency will not accelerate market processes; instead, it will distort and hinder them. The literal meaning of “slow and foolish” follows. The continuous decline in purchasing power makes economic calculations more difficult and long-term planning slower.

All fiat currencies will eventually perish. Some are destroyed by hyperinflation, while others are abandoned or integrated into larger systems (such as the currencies of small countries being replaced by the euro). But before their demise, fiat currencies always serve a hidden purpose, transferring wealth from the creators of value to those close to political power.

This is the essence of the “Cantillon Effect” proposed by the 18th-century economist Richard Cantillon. When new currency enters the economy, the earliest recipients benefit the most, as they can shop before prices rise. The groups furthest from the source of the currency (ordinary wage earners and savers) bear the costs. In a fiat currency system, the cost of being poor is extremely high.

Nevertheless, politicians, central bank governors, and mainstream economists still insist that “moderate” inflation is necessary. They should be more clear-headed. Inflation does not generate prosperity; at best, it redistributes purchasing power, and at worst, it erodes the foundations of civilization by undermining trust in currency, savings, and cooperation. The abundance of cheap goods in today’s world is achieved by overcoming the barriers of taxation, borders, inflation, and bureaucracy, not because these barriers exist.

Behavioral Science

When left undisturbed, market processes naturally tend to provide better quality goods at lower prices for more people, which is true progress. Interestingly, behavioral science is not only a critical tool but also a cognitive framework. Many people become cynical after realizing the deep flaws in the system, but behavioral science offers a clear perspective: it makes you understand that it is the producers who are the true drivers of human prosperity, not the government. Once you grasp this, even the most ordinary labor takes on deeper significance. Supermarket cashiers, cleaning staff, and taxi drivers all participate in a system that meets human needs through voluntary cooperation and value creation. They are civilization itself.

The market produces goods, but the government often produces “negative goods.” The competition among enterprises to serve customers is the engine of innovation, while the competition among political parties for control of the state rewards political tactics rather than talent. In the market, the fittest survive, while in politics, bad money drives out good.

Behavioral science helps you understand human motivations. It teaches you to look at actions rather than words, and more importantly, to think about the parallel realities that may exist: those unseen worlds that have been intervened and erased.

Fear, Uncertainty, and Doubt

Human psychology is inherently inclined towards fear. We evolved to respond to threats to survival rather than to appreciate beauty. Thus, alarmist rhetoric spreads faster than optimism. The solutions proposed for any “crisis” (whether terrorism, pandemics, or climate change) are always the same: strengthen political control.

The study of human behavior reveals its reasons. For every individual action, the purpose always justifies the means. The problem is that this is also true for those who pursue power. They exchange safety for freedom, but history shows that fear-driven transactions rarely yield good outcomes. After understanding these dynamics, the world becomes clearer, and the noise gradually fades away.

You turn off the television, take back control of your time, and realize that accumulating capital and freeing up time is not a selfish act, but the foundation for helping others. Investing in your own skills, saving, and building relationships can expand well-being for everyone. You participate in the division of labor, create value, and do so entirely voluntarily. In a broken system, the most radical action is to build better alternatives outside of it.

Every time you use fiat currency, you are paying with time for the issuer. If you can completely avoid using them, you contribute to building a world with less theft and fraud. This may not be easy, but worthwhile pursuits have always been like this.