Trust can be difficult to grasp and even harder to maintain.

What if your neighbor Joe came to you and said, “Give me all your money and I’ll hold it for you. Don’t worry, whenever you need some, I’ll give you back however much you need. Trust me!” Would you trust him?

Many people wouldn’t even trust a family member who suggested this. Perhaps you haven’t considered the fact that Joe’s proposal to trust him is exactly the level of trust we put in the government and the central bank every single day.

You may think having a bank account with dollars in it doesn’t feel like the same amount of risk as entrusting your money to the “Bank of Joe.” After all, the current system at least has a track record of holding your money all of your life. You probably expect that when you withdraw money, the bank will give it to you. When you want to spend a dollar, others will accept that dollar.

Why shouldn’t you trust it? It seems like this trust is a bit more earned than Joe randomly asking to hold all your money, despite the fact that he doesn’t even wave when he checks his mail and his dog poops in your yard pretty regularly. But, does the government and financial system deserve your trust any more than Joe?

Let’s look at some examples of trust in our currency day economy and some of the reasons why trust has begun to erode in the modern-day financial systems.

Fiat currency is trust

If you’re in the United States, or almost any other country, you’re used to using fiat currency, money created and issued by the government. Because government currency has been the consistent and pervasive form of money for most of our memory, few have had occasion to think very long about how or why that’s the case, or whether it’s a good thing.

Perhaps you’ve heard of the US abandoning the gold standard back in the 1970s. Most people, however, may not have considered what that actually means. When dollars were convertible to gold as representative money, their value was tied to the limited supply of gold. Today, the US dollar is purely a fiat currency that is backed by debt and has no intrinsic value—but we’ll talk more about that later.

For now, start considering the idea that central banks like the Federal Reserve have a complete monopoly on trust by force. Ask yourself if you like that idea. In a fiat currency monopoly, if you want to participate in the economy, you must trust the government and the central bank with all of your wealth. But the government, the Fed, and banks aren’t as trustworthy as they may seem. In reality, centralized control of currency should probably have run out of trust already. Think of fiat currency as slowly boiling the economy with average citizens becoming frogs in that water.

The global financial crisis

Maybe, just now, you quickly bought something on Amazon to make sure you can still trust that your money is usable. It probably worked—hopefully you’ll even receive your package later today with same-day delivery. So, why is it that you shouldn’t trust a centralized power with your hard-earned wealth? Well, the 2008 global financial crisis (GFC) is a great example.

For almost a decade leading up to the GFC, too much debt was being taken on in the housing market. Encyclopedia Britanica says that subprime interest rates “had enabled banks to issue mortgage loans at lower interest rates to millions of customers who normally would not have qualified for them.” Because many of these were adjustable mortgages, when housing prices began to rise, many people could not make their increasing mortgage payments. The banks that had issued these high-risk loans were over-leveraged as people defaulted and created a panic. So, the government stepped in.

Monopoly on trust: debt to the moon

A really important aspect of our fiat economy most people don’t understand is that the US dollar is a debt-backed currency. This means that what drives demand for the dollar is not any kind of real value. Some say the dollar’s value is simply a shared belief in its status as legal tender, but that’s not the entire picture. Even if trust were to completely evaporate—more than in 2008—dollars would remain a necessity as the global reserve currency in which the world must repay dollar-denominated debt. This is by design and the government can apply force if people fail to pay their debts in dollars.

When President Nixon removed gold convertibility in the United States in 1971, the US dollar secured a complete monopoly on trust. Gold has intrinsic value and is also limited in supply. When dollars were pegged to the amount of gold in the treasury, paper money retained a relatively stable, real value. But when the dollar was no longer tied to gold, the only thing giving it value was a forced trust that it could be spent tomorrow because the government would compel debt repayment.

Debt-based monetary policy uses tomorrow’s dollars to force demand today. The demand is created by leveraging every dollar many times over so that everyone needs dollars to pay back what they’ve borrowed. A perfect way to do this is fractional reserve banking, which allows banks to lend out every dollar more than once. Say you deposited $100 in a bank account. The bank could then lend out your $100 to someone else and add that debt to the balance sheet as another deposit, which it could then lend out again. This can go on infinitely as long as the bank maintains the required reserve ratio.

Until recently, the required reserve ratio was 10%, meaning that banks must keep 10% of the money they lend out to ensure liquidity for those who want to withdraw their money. But, in 2020, the Fed declared a new 0% fractional reserve ratio. By not requiring any reserve dollars, banks are able to lend out even more money to even more people, creating even more debt obligations. Does that sound familiar?

Inflation: inflate away your troubles

Clearly, the GFC demonstrates that the government and the Fed have myriad ways to influence the economy, many of which exert control over the money supply—usually to increase it—and it’s not as if they’re reluctant to do so. Modern Monetary Theory (MMT) postulates that governments shouldn’t be at all concerned about increasing the money supply. In fact, it’s the first and best tool of MMT.

But increasing the circulation of dollars is not without consequences. With more dollars available to buy the same amount of goods, each dollar’s value is necessarily reduced. When the Fed inflates the circulation of dollars, it’s stealing from you by debasing the dollars you’ve already earned. If you work for money today, the value of those dollars tomorrow is out of your control, even though you “paid” for that value with your time and work. How much your money can buy tomorrow or in 10 years is completely and arbitrarily controlled by the government. Your time and work, as you’re reminded at the end of a long week, is real and limited, unlike the money supply.

Monetary inflation is one of the government’s favorite ways to steal your wealth because, unsurprisingly, citizens usually object to increasing taxes. Debasing the currency, however, is an easier, less obvious way to extract value. Another way the government does this is through quantitative easing (QE). By creating sovereign debt in the form of bank reserves and buying assets in the economy, people are incentivized to give up their long-term securities in favor of short-term ones. This effectively pushes more money into the economy.

Advocates of QE say that because the increased money supply is intermediated by banks, inflation won’t reach the consumer price index. However, it still inflates the money supply and a look at the M2 money stock over time shows that. Even if consumer prices are not increasing rapidly, the purchasing power of the dollar is decreasing.

Checkmate: debt and dollar circulation have a circular dependency

So, you’re forced to trust the government and the central bank who are consistently increasing debt and dollar circulation over time. Does it feel like you’re over a barrel yet? Is the “Bank of Joe” looking more attractive to you? Let’s think about what these economic manipulations could mean for your future.

You’ve probably been told that it’s not enough to simply save money, you also need to grow your money. If you have $30,000 in the bank today but you want to spend that money 35 years from now when you’ve retired, you cannot even rely on that $30,000 to buy what it buys today because purchasing power decreases with monetary inflation. The government even believes there is a necessary and desired rate of inflation over time—roughly 2%. This means that in order to keep the value of your money consistent into the future, you need to grow it by at least the rate of inflation every year. Over two decades, that’s around 40%!

In discussing the results of the government’s trust monopoly and the financialization of the economy, Parker Lewis argues that, “The aggregate impact [of inflation] is massive malinvestment; investment in activities that would not have occurred if people were not forced into a position of taking ill-advised risk merely to replace the expected future loss of current savings.”

The idea of saving is disincentivized in MMT because forcing increased investment is supposed to stimulate economic growth. But, that also means, over time, the global economy becomes more and more insolvent as savings decrease and debts increase. Allowing the market to correct itself would cause nearly the entire world to default—which is why the government feels obligated to continue inflating the currency. But, what that means for you and your neighbor Joe is that you’re both forced into riskier and riskier positions, simply to maintain your ability to live in the future.

The gold standard’s shining track record

The GFC and removing the gold standard are not the only blemishes on the government and the Fed’s “shining record” of trust. If you don’t think they could or would shut down your bank account, all you have to do is rewind to 1933 when President Roosevelt declared a banking holiday for one week, during which, all banking transactions were suspended. No one could access their funds in the bank or even cash paychecks. The goal was to prevent bank runs as people’s trust teetered on a cliff’s edge. Closing the banks still wasn’t enough to quell distrust, however, so people were also compelled to turn over their gold to the government with the gold buyback, which made owning gold illegal.

“Yes, but that was a long time ago,” you may say. But the government is still at it today as central powers force you to give up your wealth. In 2020, COVID-19 QE interventions foisted nearly $3 trillion on the money supply. MMT advocates assert that the economy has not seen inflation as a result of QE, but the CPI was up 5.3% over the previous year by August of 2021.

Opting out of a trust economy

As you can see, our entire civilization’s infrastructure is based on a centralized trust economy through the government and financial system. While the powers we’re forced to trust assure us that they are protecting us, we keep asking how we can restore the trust of the public. What we should be asking instead is: Is there a way to remove trust from the monetary system?

The OECD Business and Finance Outlook 2019 says, “A decade after excessive debt in the housing market contributed to the financial crisis, widespread stress in the sovereign, corporate credit, and bank CoCo markets could draw public scrutiny to the effectiveness of post-crisis reforms.” That ought to be quite the understatement if people were paying attention to what the constant post-crisis reforms were and continue to be. But of course, it’s not in our trusted overlords’ interest to keep you informed about the reality of your economic situation.

Until recently, it was simply impossible to remove oneself from the trust economy. Centralized powers maintained their tight grip on the trust monopoly. But today, exit strategies are beginning to open through decentralization.

What if you could opt out? What if you could extract yourself from the tentacle-like grip of centralized trust? What if you didn’t have to trust government oversight or your neighbor Joe? That’s the goal of decentralized finance. The Fed would like everyone to believe that crypto assets and DeFi are too volatile to be “safe.” It would like you to believe that it is protecting you from risk. But is inflating away your savings and pushing you into riskier investments really protecting you? Perhaps you’d like the opportunity to protect yourself.

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