The hidden cost of broken money

Housing affordability tells the story of monetary debasement clearly. In 1940, a median home cost $2,938—about 2-3 years of average income. Today, the median home costs $416,900 while median household income is $80,610—over 5.2 years of gross income. This represents a dramatic shift: where previous generations could realistically save for a home in just a few years, today's workers face a much steeper climb. The acceleration is particularly striking in recent years. From 2020 to 2022 alone, median home prices exploded 46%—one of the fastest increases in U.S. history—while wages barely kept pace with official inflation.

Housing isn't unique—basic necessities consume larger portions of income while wages lag behind. The natural scarcity that once made money valuable has been replaced by politicians promising they won't print too much.

Remember: scarcity is money's most important property because it prevents arbitrary increases in supply. When Nixon temporarily closed the gold window in 1971, he replaced natural scarcity with trust in political restraint. That temporary measure is now 55 years old.

The costs of this transition weren't immediately obvious. But five decades later, the mathematics are undeniable. When governments can expand money supply at will, wealth transfers from savers to asset holders, from workers to those with access to credit.

Understanding how we lost sound money is only half the story. The other half is understanding what this broken system costs you personally—so you can make informed decisions to protect yourself rather than fall victim to a rigged game.

The Cantillon Effect: Who Wins and Who Loses

When central banks create new money, it doesn't affect everyone equally. The 18th-century economist Richard Cantillon identified a crucial pattern: those who receive new money first benefit at the expense of those who receive it last.

Here's how the wealth transfer works

First to receive new money:

Major banks get new reserves and can lend at favorable rates
Large corporations access cheap credit for acquisitions and stock buybacks
Government contractors receive freshly printed payments
Asset holders see their stocks, bonds, and real estate rise in price

Last to receive new money:

Wage earners whose salaries adjust slowly to inflation
Savers whose bank deposits lose purchasing power
Retirees on fixed incomes watching their nest eggs shrink
Small businesses competing against cheap-credit-fueled giants

This pattern repeats during every monetary expansion. When central banks create money, it flows to those closest to the money spigot first. Banks and large corporations get cheap credit while ordinary workers see rising prices before their wages adjust. Asset prices rise immediately while wage adjustments take months or years.

Your housing example isn't coincidence—it's mathematics. When new money flows first to those who can buy assets, asset prices rise faster than the wages of those who need to buy them. Each monetary intervention widens this gap.

This creates systematic inequality: those with access to credit and assets get richer, while those dependent on wages and savings get poorer. The system rewards financial speculation over productive work. Real estate's monetary premium overwhelms its utility value—houses become stores of value instead of shelter. Capital flows toward leveraged asset purchases rather than business investment.

Total net worth held by top 1% vs bottom 50% from 1989 until today

The Cantillon Effect isn't a bug in the system—it's how the system works. And it accelerates with each crisis that justifies more monetary expansion.

Financial Repression: The Hidden Tax System

Governments facing high debt levels have historically used a strategy called financial repression—essentially forcing citizens to subsidize government debt through monetary policy.

Here's how it works:

Central banks keep interest rates artificially low, often below the inflation rate. This creates negative real returns on safe investments like bank deposits and government bonds. Savers lose purchasing power while governments reduce their debt burden through inflation.

Your savings account earning 1% while inflation runs 5% isn't market failure — it's policy design. The government needs to channel money into Treasury bonds to fund spending, even when those bonds offer terrible returns. Capital controls and banking regulations ensure money has few alternatives.

Meanwhile, those with access to credit benefit enormously. Corporations and wealthy individuals can borrow at artificially low rates to buy assets that rise with inflation. If you can access a 3% loan to buy real estate appreciating at 8%, you're being subsidized by savers earning negative real returns.

This creates a dual economy:

Asset holders: Benefit from both cheap credit and appreciating assets
Savers and wage earners: Lose purchasing power while subsidizing the system

Traditional financial advice no longer works. Previous generations could build wealth by saving money in banks and buying bonds. Today, following that advice guarantees wealth destruction. Everyone is forced to become an investor just to maintain purchasing power.

The human costs are accumulating. Young adults face harder choices — homeownership rates for those under 35 have fallen from 45% in 1990 to 39% today, while the share living with parents has doubled from 12% to 20%. Retirees who saved for decades find their money doesn't buy what they expected. Families who avoided debt and built savings the responsible way watch their purchasing power erode while those who borrowed and bought assets get ahead.

The tragedy: This wealth transfer happens silently. Unlike explicit taxation, most people don't understand that monetary policy is redistributing their wealth to asset holders and borrowers.

The Acceleration Pattern: 1971, 2008, 2020

The Nixon Shock of 1971 didn't immediately break the monetary system—it changed the rules gradually. For decades, money creation remained relatively restrained. Then came the accelerations.

2008 Financial Crisis: The Federal Reserve created more money in months than had existed in decades. Quantitative easing became the new emergency tool. What was once unthinkable—central banks buying trillions in bonds—became standard policy.

2020 Pandemic: M2 money supply — which includes cash, checking accounts, savings accounts, and other easily accessible money that people actually use for spending — experienced the most dramatic expansion in recorded history. M2 is considered the most reliable measure of money creation because it captures the money that directly affects prices in the real economy. M2 money supply growth reached 26.9% year-over-year in February 2021, the highest rate ever recorded and far exceeding even the monetary expansions of the 1970s inflation or the 2008 financial crisis. Despite official inflation peaking at 9.1% in June 2022 — the highest in 40 years since the Nixon Shock — there remains a massive discrepancy between 26.9% money creation and 9.1% measured inflation. We'll explore in a future post why the official inflation - Consumer Price Index (CPI) - is not a reliable measure and systematically conceals the real cost of inflation. The European Central Bank (ECB) expanded its balance sheet similarly. Central banks worldwide created more money during this period than in all previous years combined, while the U.S. economy contracted by 3.4% in 2020 and global GDP fell by 3.4% — the sharpest downturn since the Great Depression.

The Pattern: Each crisis provides justification for larger monetary interventions. Whether the crisis is financial collapse, pandemic, or war, the solution is always the same—create more money. The "emergency" becomes permanent policy.

Notice how this works politically: who argues against helping people during a crisis? The perceived benefits appear immediate—stimulus payments, promises of economic support, talk of preventing depression. The real costs—higher prices for necessities, artificial market distortions, zombie companies kept alive by cheap credit—appear months or years later and are harder to trace to their monetary origins.

Here's what the numbers reveal: Housing prices rose 58% from 2009-2020 while median household income rose 34%. Since 2020, housing prices increased another 30% while incomes rose approximately 15%. The gap widens with each intervention.

The mathematics suggest this trajectory continues: each crisis requires larger monetary interventions to achieve the same economic effect. The next crisis will demand even greater responses, creating even larger distortions.

Every crisis provides new justification for monetary expansion. Today it's the pandemic and war. Tomorrow it will be climate change, aging populations, or infrastructure needs. The specific crisis matters less than understanding the pattern.

Politicians face a simple calculation: raise taxes (immediate political cost) or create money (delayed, diffused costs). The choice is obvious. Central bankers face pressure to "do something" during every economic downturn. The tools available are interest rate cuts and money creation.

This isn't about left versus right politics. Conservative politicians expanded money supply during the 2008 crisis. Progressive politicians expanded it during the pandemic. The incentive structure transcends political ideology because the costs and benefits fall on different groups at different times.

The broader public sees some immediate effects: lower unemployment, rising house values, stock market gains. The costs—eroded purchasing power for necessities, artificial market distortions—appear gradually and are often attributed to other causes. Oil companies get blamed for gas prices. Grocery stores get blamed for food costs. Housing shortages get blamed for unaffordable homes.

Meanwhile, those who benefit from monetary expansion have strong incentives to continue the system: governments can spend without raising taxes, banks profit from lending newly created money, and asset owners see their wealth increase. The concentrated benefits create powerful constituencies for continued expansion.

The deeper problem: Even with perfect politicians, returning to gold wouldn't solve anything. Gold's fundamental weaknesses—slow transport, difficult verification, heavy weight—are what forced us into this system originally. Any attempt to use gold in the modern world requires custodians and paper claims, which inevitably leads back to fractional reserves and the same problems we have today.

The Need for Technological Solution

Understanding monetary basics matters more today than during the post-war decades, when money's supply was at least theoretically constrained by gold reserves. Today, every major crisis—pandemic, war, economic downturn—gets addressed through monetary expansion.

They've convinced us that 2% inflation is "healthy" when what's healthy is your money gaining purchasing power as human ingenuity makes things more abundant. But wouldn't people stop spending if prices were falling? This common objection misunderstands human time preference - people still need food today, shelter today, and want to consume goods and experiences today regardless of tomorrow's prices - just in a more sustainable way. We'll explore why the deflation spiral narrative serves those who benefit from monetary expansion in a future post, but consider this: technology prices have been falling for decades while tech consumption exploded.

Whether through obvious inflation or stolen deflation, the result is the same: those who create new money benefit, while those who hold existing money lose purchasing power.

The pattern reveals the fundamental problem: as long as the power to create money remains centralized, it will be used. Crisis provides justification, politics provides cover, and mathematics provides the inevitable result—your purchasing power declines while those closest to money creation benefit.

This violates the most basic principle of democratic governance: separation of powers. We understand intuitively why the same people shouldn't write laws, enforce laws, and judge laws—concentrated power corrupts even well-intentioned people. Yet we've handed the same government both the power to spend money and the power to create money. What did we expect would happen?

The Founding Fathers understood this danger intimately. Article I, Section 10 of the Constitution explicitly prohibits states from making "any Thing but gold and silver Coin a Tender in Payment of Debts." They had lived through the hyperinflation of Continental currency and watched paper money destroy savings. As George Washington warned:

George Washington quote: paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice

Ironically the man who most strongly warned against paper money ended up as the face of American paper currency.

This isn't about trusting better politicians or hoping for more restrained policies. It's about recognizing that any system requiring such trust will eventually fail when the incentives point toward expansion. The temporary always becomes permanent. The emergency always becomes normal. We need monetary separation of powers—a system where those who spend money cannot create money, just as those who write laws cannot enforce them.

The technological problem requires a technological solution. The speed gap between transactions and settlements that broke gold's monetary role still exists. Political promises of restraint cannot close a technological gap.

What if money's scarcity could be guaranteed by mathematics rather than promises? What if transactions and settlements could both happen at the speed of light? What if sound money could be restored not by returning to the past, but by building something that solves the technological problems that made fiat money inevitable?

What if we could rebuild society on a foundation where saving is rewarded, where productive work outcompetes financial speculation, where your children inherit a world where money gains purchasing power instead of losing it? A monetary system that aligns incentives toward long-term thinking, genuine productivity, and sustainable prosperity rather than debt, consumption, and asset bubbles.

The hidden costs we've explored—stolen productivity gains, systematic wealth transfer, the destruction of savings—aren't inevitable features of modern economies. They're artifacts of broken money. Sound money creates sound incentives. Sound incentives build sovereign individuals and sovereign individuals build sound societies. That's why Bitcoiners use to say: Fix the money, fix the world!

In the last post of this knowledge series we'll explore how Bitcoin fixes this!