Hedge against inflation, How?
Investopedia defines inflation as “the decline of purchasing power of a currency over time.” One of the biggest drivers of inflation is the monetary supply. When the government puts more money in circulation, each currency unit buys less than it did before. When they take money out of circulation each unit of currency accepts more.
Inflation is Confiscation
No less a financial luminary than Alan Greenspan equated inflation with confiscation (see quote above). He made the case that the gold standard protected wealth from inflation. But the gold standard is dead.
Gold protected currency from inflation because it was valuable and in limited quantity. The gold standard put serious limits on the amount of money a government could print. Having a commodity like gold to back a currency made the relationship between inflation and confiscation very clear to everyone.
Commodity and Fiat Currency
When the value of the currency was backed by gold it was a “commodity currency.” The value of each US Dollar (USD) was directly correlated to the value of a Troy Ounce of gold. The US Treasury kept supplies of gold in Fort Knox and other locations. The amount they kept in the Treasury was linked to the amount of currency in circulation (the monetary supply).
I was printing more money without increasing the amount of gold making each USD worth less. This primary cause of inflation was easily seen and not well tolerated by the People.
Fiat is an edict. Words in print, or spoken. When we dropped the gold standard the USD became worth exactly what the US Government says it is. Or, what other countries believe it is worth. Today, the sovereign currencies of the leading countries in the world are all fiat currencies. The commodity backing their value is words. Words are never in short supply when politicians are around.
Hedge against inflation: Deficit Spending Feeds Inflation
In 1966 economist and banker Alan Greenspan, who later served for 19 years as Chairman of the Federal Reserve (1987 to 2006), made the case that the departure from the gold standard was to hide the “shabby secret of the welfare statists [that] deficit spending is the confiscation of wealth.” (Greenspan, 1966)
Crypto Stablecoins and Inflation
In the cryptocurrency world, so-called stablecoins typically peg their value to a selected fiat currency. They do this through formulas and buying fiat currency and near-liquid monetary assets such as government debt instruments (e.g., US Treasury Bonds). They back their cryptocurrency with fiat currency reserves. As a result, inflation passes straight through to stablecoin buyers.
Hedge against inflation: Zombie Inflation
In popular fiction, zombies shuffle slowly along mindlessly trying to catch you and eat you. They generally don’t move fast, but they are relentless and hard to kill. Inflation is like an economic zombie pursuing your wealth.
A terrifying fact about this economic zombie is that fiat currency is designed to attract it. Governments want inflation for two reasons.
- They can incur debts today and pay them later with money that is worth less. In other words, they run up a budget deficit of a trillion dollars today. When they pay off that trillion-dollar debt years from now the money they use then has far less buying power than it has today.
- Inflation allows them to take wealth from you without having to use taxes.
Keeping your wealth in fiat currencies or investments tied to fiat lets inflation zombies eat your wealth one bite at a time.
Zombies Hate Dirt
Economic zombies don’t like currencies backed by commodities like gold or dirt. The value of a commodity-backed currency is as stable as the supply and value of the underlying commodity.
Fiat currencies are backed by an infinite quantity of the commodity of words. We all know that “talk is cheap.”
DirtiCoin backs the value of every DirtiDollar (DiD) with real estate (dirt). This makes DirtiCoin a commodity currency. Its value is protected by the value of the dirt. When you shift your wealth from fiat currency into DirtiCoin you hedge your wealth against the ongoing predation of inflation.
As a commodity, dirt is ideal for backing the value of the currency. Science fiction to one side, the supply of dirt is limited to the confines of planet Earth. Habitable and arable dirt has is the most stable value. Some dirt spikes in value because of the mineral wealth beneath it.
Every year people come up with new ways to live in places that couldn’t be used before. Still, it is safe to say that they aren’t making any more dirt. They’re just learning better ways to use what we have.
Dirt Beats Volatility and Inflation
The stable supply of dirt and its well-understood value basis dramatically decreases the volatility of its value. The ever-increasing needs for habitable and arable land keep pushing the value of dirt upward. This steadily increasing demand in the face of a fixed supply increases the value of that supply year over year. In other words, the commodity of dirt beats inflation.
Because DirtiCoin is backed by the value of real estate it has an innate tendency to be a deflationary currency. When inflation goes up, so does the value of the real estate. As a result, the buying power of each DiD increases when the dirt gets more valuable. In contrast, fiat currencies, such as the US Dollar, are deliberately managed to sustain some level of inflation. This means they are designed to decrease your buying power over time.
DirtiCoin hates inflation. It is designed to protect the buying power of your stored wealth. The value of every one of your DiD grows along with the value of dirt.
Inflation zombies hate DirtiCoin. They want to eat away at your wealth while you look on helplessly.