To The Moon

Inflation is the boogie man of the moment in financial media and it’s been that way for 17 years.

Quantitative easing, the rise of Bitcoin, and the idea of “sound money” — whatever that is — has led a lot of people to think the U.S. government and the Federal Reserve are somehow screwing us over with inflation and the U.S. dollar is somehow junk.

But the Fed has an inflation target of 2% long-term for a reason.

Why does the Fed want inflation?

The simplest answer is to think about the counterfactual. If you’re anti-inflation, you must be pro-deflation!

What happens in a deflationary environment? A dollar buys more in the future than it does today. The incentive is to put off spending.

This leads to less consumer spending. Less economic activity.

It leads to the hoarding of money.

Just ask Michael Saylor, who thinks Bitcoin is “sound money”, and what he’s doing with his Bitcoin. He’s accumulating more and more and more. He’s hoarding.

He’s not spending Bitcoin.

And spending money is how the economy functions.

I’m here to make the argument that inflation — in moderation — is good!

What Is Money?

I just had to include this. One of my favorite Pixar shorts.

We often talk about money in terms of wealth like, “Elon Musk is worth $80 bajillion dollars.” But Elon Musk doesn’t have $80 bajillion dollar bills.

At its core, money is a medium of exchange.

When you go to a store, you need to exchange something for the good or service you’re looking for. Beaver pelts are no longer socially acceptable to carry around and tulip bulbs didn’t turn out to be a great medium of exchange. What the world settled on was coins and paper denoting a currency and the most common medium of exchange today is the U.S. dollar.

Dollars are fungible, meaning one dollar is the same as the next.

A dollar can be used to pay for a hot dog, massage, airline ticket, software, etc.

Go to almost any country with a dollar bill and you’ll be able to exchange it for goods and services because people think it has value and they can exchange it for something they need.

That’s what money is for. It’s what the U.S. dollar is for.

So, why isn’t the U.S. dollar “sound money”?

Is There Such Thing As Sound Money?

While the dollar is a solid medium of exchange, the critique is that it doesn’t hold value. And that’s true. It’s not “sound money” as Saylor and other inflation critics want it to be.

Here’s the official definition of sound money:

Money not liable to sudden appreciation or depreciation in value.

For centuries, investors have been in search of an asset class that holds its value over time. Gold $Barrick Gold Corp(GOLD)$ was thought to be that asset and the U.S. dollar was once on the gold standard, something some would like to see us return to.

But gold has value because people think it has value, just like currency.

And gold can be mined, increasing supply, just like currency.

A currency backed by gold is also inflexible.

Let’s say the economy is booming and people are building houses and businesses and wages are going up and economic growth is 10% per year.

But the gold in reserve backing the currency is only growing 1% per year.

The demand for the currency backed by gold rises because the economy is booming, which leads to more value in the currency, which means people will think the value of the currency will go up in the future, so they should save it.

When people start saving money instead of spending it…you get a recession.

At the end of the day, there’s no such thing as a currency or asset that has a stable value. Values change. What the Fed and government need to decide is whether they want the value of a dollar to get stronger or weaker over time.