npub1aw…nyrgs on Nostr: Let's start with the deflationary spiral. Its a long topic to understand but I'll do ...

Let's start with the deflationary spiral. Its a long topic to understand but I'll do my best. So let's start by defining 2 different monetary systems.


System 1, commodity money: this is a system where the money is a commodity, a scarce good, like gold or bitcoin, but for the sake of simplicity I'll use gold. In this system, economic resources (land labor capital) must be expended to create new monetary units (mining for gold).

Of all the commodities in the world, silver, iron, salt, cars, plastic etc., gold is the hardest to produce more of (except for bitcoin). So, if you think about it, all other commodities will be produced in greater quantities than gold, the exchange rate of gold to any other commodity will always rise over time. This is deflationary, the value of the gold is always going up.


System 2, credit: in our current system, money is created ONLY through lending. When you get a loan to buy a house, the fed is writing that money into existence on their ledger, and loaning it to your bank for interest (this is the fed funds rate, currently 5%). The bank loans you this money for interest, usually 2-3% above what they get it for. You spend the money into the economy, paying for the land, the material, the labor for your house. The same thing happens at the government level, money is loaned into existence by the Fed to pay the governments bills, the government pays this into the economy, but they owe the fed interest.

Now, this presents a problem, because the Fed is owed more money than the total amount of dollars in the system, in fact, a lot more. So much more, that almost all debt is only serviced (paying minimum interest payments), its never paid off, its only rolled over (which can mean paying higher interest), meanwhile new debt is being accrued. In this system, the currency is always being devalued by the creation of new credit.


So to see the difference in these 2 systems, in a commodity money system, investment has to be funded through savings, there isn't a central bank that can print money into existence. In fiat the same investment is funded through credit, printed money that's owed back to the fed at interest, meaning a failed investment on the part of the bank is a real issue because they owe money up the chain. In a commodity money the bank loses their investment, but since it was funded through savings the contagion is naturally more contained.

When banks default on their loans in a fiat system, the debt hole that's created quickly spreads to other banks and the system as a whole, the money is sucked out of the system, bank runs, unemployment, depression ensue. This is the deflationary spiral, the rapid repricing of dollars because the credit bubble collapses. This effect is far more contained in a commodity money system, because money is real and doesn't get evaporated away by interest payments.


To put this into a final bit of perspective, there's less than $1T dollars, even electronic dollars. There is $32T in government debt, the banks have in excess of $2,000T (yes, you read that right) in debt exposures. When the value of the dollar rises too much (when, not if), these debts will default and the dollar chart will look like OG bitcoin pumps, the effect will be so catastrophic that everyone will call for a bailout, the final act, also known as "monetizing the debt". This is printing money to paper over losses that never existed outside of a balance sheet.