Look out! Things are not always as they seem.

One of the most arresting thoughts is that what you perceive as normal might actually not be true.

Although different in many ways, I find that astrophysics and economics have a lot in common. Specifically, both require an adequate sense of scale when examining the system appropriately. In addition, provable truths in both can seem to contradict our personal experience.

Take relativity theory, for example. One basic principle is that if an object accelerates in relation to another, that time slows down for that body. Furthermore, being subject to a gravitational field is equivalent to accelerating, oddly. Braving the hazards of illustrating general relativity in three sentences, I’ll finish with the fact that your head is older than your feet, by virtue of the fact that your feet spend more time closer to the earth’s core.

This isn’t just postulation. It’s a fact. If you take two synchronized watches, and put on in an airplane that circles the globe a few times, and then bring them back together, the intrepid timepiece will run ever so slightly behind its twin. But why is this important?

The reason that it is important is because details matter. From esoteric observations of stars in different galaxies, to calibrating satellites, we need the details to get the answer right. Every time that you let Siri guide you in your car, you rely on the GPS system keeping proper time – relative time, that is – to get you where you want to go.

Money is the same. On the surface, it’s pretty simple. At all points of observation, it appears to behave as it should. You earn it, put it in the bank, take out cash, send payments, spend it with your credit card, put it back in the bank, and so on. From a very narrow perspective, fiat currency works just fine.

But applying the concept of scale, we might become a little uncomfortable when broadening our scope. In this case, time is the most appropriate ruler. Just as we can’t perceive our heads as older than our feet, we have trouble finding fault with our money.

Fiat currency has two black marks against it. One is a terrible track record of devolving into hyperinflation, and the other is its inability to stand up to systemic analytical muster – in short, unbacked fiat currencies are impossible in the long term, completely unsustainable.

To address the first: it may be that the US dollar has operated more or less properly during the last 40 years. But time is not on its side. By historical standards, it is well past due to flutter off into the pages of failed currencies.

To address the second: I won’t belabor the details, but suffice it to say for our purposes that fiat currency is created through the issuance of debt, meaning that today’s money is debt. When we create more of it, we create more debt, and when we pay debts off, money is destroyed. But the basic equation at play is that from the moment currency is created, debt begins to outpace it. From a 30,000 ft. view, debt must grow faster than currency, and as such will consume the latter eventually.

So why is this relevant to us? In the same way that misapplying the theory of relativity would result in confused satellites which would ping geographic coordinates that drift ever so slowly across the earth, putting us farther from our destination with time – maybe imperceptibly so -, relying on fiat currencies carries its own risk and repercussions, not least of which is a pervasive and uneasy drift towards economic inequality and poverty. It happens slowly, incrementally, and no matter how hard you might stare at the $20 bill in your wallet, you won’t find the inherent flaws that are causing the problem, real as they are.

If fiat currencies are doomed in general, then what should we do? Well, if history is a teacher, those who favor real assets such as gold, stocks, and real estate tend to do better than those who hang on, but only during the last stages. Admittedly, timing this stage is incredibly difficult. But even if you don’t know when it will happen, you can still be certain that it will happen.

Bitcoin may not be a viable alternative, but in my estimation it will be. Despite its growing pains and volatility, it does provide a compelling alternative, something that isn’t created or destroyed through the credit creation process.

There may come a day in the next few years when people’s psychology switches from worrying about not being the first one into Bitcoin, to worrying about being the last one out of fiat. Although not imminent, this transition can occur incredibly fast, over the course of months.

So look out! Perhaps your fiat system is not as it seems.


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