Previously
In the previous articles (here), we examine what the eroding power of inflation has done to our wallets as individuals. In addition, we’ve looked at the areas where the state has stepped into legislate, regulate, and dominate our lives in every single sector possible.
Why All The Fuss?
So, we must ask ourselves:
- Why go to all of this trouble?
- What is in it for the government?
- Why do people tolerate it?
- What happens when people see it?
Much of the effects and allure of monetary inflation come from a pernicious psychological trick that was popularized by Keynesian economics. [1] Without going into any detail about Keynesianism, suffice it to say that these three causes & effects occur because of it:
- Running the “printing presses”
- Government (and the commercial banks) run the virtual (cyber) printing presses to add more currency to the existing supply.
- Increasing your paycheck
- That newly printed currency eventually makes its way into your paycheck, which increases the number which you see (whether it be on a physical check or your direct deposits).
- This increase creates a dopamine rush [2] when we see that new and bigger paycheck causing us to think that we are earning more money and that our buying power has gone up.
- Decrease your purchasing power and savings
- This increase in the paychecks has happened to just about everyone who earns money. So, most everyone has more money to spend.
- If everyone has more currency, then this drives prices up against the same limited supply of goods and services. Then, increases in the prices of goods and services actually goes up faster than your paycheck can go up.
- In addition, your savings account loses purchasing power (as we demonstrated in the first few articles of this series).
Nerd Note: The above is slightly over-simplified but the cycle is basically the same as described. For the nerds out there, consider tackling the book “The Theory of Money and Credit” by Ludwig von Mises.
What is going on here?? If increasing the money supply keeps decreasing our purchasing power then why do it?? Why accept it??
“Number Go Up“
In modern parlance, we call this phenomenon, “Number Go Up” (NGU), which is the ability to make something seem better just because there are more units in existence. In the worlds of economics and behavior science, we call this “unit bias“. [4]
In this instance, we think that we are getting more purchasing power (from more dollar units) while the value of each unit has gone down. Overall, the shift is so small, so subtle, and so widely accepted that it eludes the eye. The unconscious assumption is that the new dollars that we are receiving are of the exact same value as the dollars that we previously received and owned.
I remember a funny story that my “Algebra 1” (and “Algebra 2“) teacher told us years ago to illustrate the concept of unit bias:
“A customer called his local pizza shop to order a pizza. The restaurant owner asked the customer, ‘Do you want me to cut the pie into six pieces or eight?’ Without hesitating, the customer replied, ‘Better cut it into six; I don’t think I can eat eight.‘ “
We all understand the joke but we might not be able to articulate it in exact terms. That is the same theme with regards to our paychecks and food prices going up; we understand the joke being played on us but might not be able to explain what’s happening.
In essence, like the individual slices of pizza, the value of our old dollars of yesterday are more valuable than the new dollars of today (our purchasing power goes down). Yet, just like all of the slices of pizza (whether they be 6 or 8) in total make 100% of a pizza pie, all of the US dollars (whether they be 6 trillion or 8 trillion) in total make 100% of the entire money supply. If we as individuals make 20% more in our paychecks that doesn’t mean that the money supply is now 120%; the money supply is always just… 100%. Therein lies the mental trick; every single person receiving a higher paycheck thinks that they are getting a bigger slice of the pie. In essence, this is the “Lake Wobegon Effect” [3] where, “all the children are above the average“. Sure, every person is getting more “units” (which we call “dollars“) but every new unit in that moment is smaller than the previous measure. This logically fallacious way of thinking actually has a name – “unit bias“. [4]
In the next two sections, we examine how NGU and unit bias affect us directly and our culture overall.
Real Returns
We see the effects of unit bias in people’s investment portfolios. Let’s take a look at those effects in a simple example of a hypothetical investment portfolio that any of use might have.
Let’s say that you have a portfolio that has consistently gone up by an average of 5% per year over 40 years (for a total return of 604%) [5]. Should you be happy?
Normally, the average person would be quite satisfied with that average rate of return. But, let’s use our “erosion rate” of -5.6% (which we calculated the first article, here).
Due to the fact that inflation is actually outpacing the return on our example portfolio, our true average annual rate of return is actually… -0.6%. We call that true return our “real return” because it takes inflation (but not taxes) into account. [6] In essence, it means that inflation is eating up our buying power even though it looks like our portfolio is doing quite nicely!
On paper, our portfolio has gone up by 604%. In actuality (in inflation-adjusted “real” terms), our portfolio has actually decreased by 21% [7] leaving us with only 79% of our original purchasing power. That is unit bias working against us because we think we have more buying power on paper when in reality we actually have less.
Cultural Impacts
This act of running the (cyber) money printers is the modern “bread and circuses” [8] equivalent of the ancient Roman circus where the emperor threw bread to the masses to appease them for the moment, giving them a “dopamine rush” and manipulating them into forgetting government induced problems.
When artificially and haphazardly induced, the dopamine rush can become an addiction. Much like all addictions, in the moment, issuing more money (“running the printing presses“) looks and feels good on the surface yet causes so much corruption of reason, rationality, and moderation.
In the context of money printing (increasing the money supply), what is that dopamine rush? How can it be so effective yet so harmful? What are the effects of inflating the money supply on our culture?
To start, let’s rewind the clock to August 15, 1971. This is the infamous day when President Richard Nixon officially and finally took the U.S. off of the “Gold Standard“. [9] [10] This was the third and final step in removing the Gold Standard as the basis for the U.S.’s monetary system. After that, all ties to reality were severed from the U.S. Dollar. From there the cultural health of our country began its true plummet.
To scratch the surface on this broader look at the effects on our culture, let’s take a look at this website www.WTFHappenedIn1971.com. [11] We see the pernicious effects of using “money” which does not have any basis in reality. Below is a series of five graphs which measure various aspects of our lives (real estate, personal finance, prison incarceration, demographics, and obesity).
“How Long Does It Take To Save For A House?“
“Working Hours To Buy The S&P 500 (1860 – 2020)“
As you can see from the above graphs, a corrupted money most probably leads to corruption in real estate, investing, law enforcement, families, and health & wellness. All of these charts show just how pernicious the effects are of the state corrupting our money and subordinating the philosophy and values of the citizenry to those in the bureaucracy. The state is hoovering up value that the people create and using it for its own nefarious purposes outside of the well-defined role of the U.S. Constitution.
While it is beyond the scope this opening series of posts to go into the how and why a corrupted money always corrupts the culture, I think even a cursory glance at the charts from “WTF Happened In 1971” show us that there is strong evidence for that corrupting influence across dozens of different sectors and metrics. In short, my explanation for why this happens is because makes the will and philosophy of the people subordinate to the will and philosophy of the state. When this happens, the priorities of the citizenry become distorted, twisted, and, ultimately, corrupted. Eventually, these corrupted philosophies manifest themselves in the ways that we see in www.WTFHappenedIn1971.com. This long term corruption of the nation has happened for millennia. We will cover this effect in future posts here in www.BitcoinInPeace.com.
Next Steps
In the next article in this series, here, we will take a hard look at the final results of using soft money (fiat currency) that has no basis in reality. As seen above, these results have affected everything from physical health to financial health to cultural health.
Ultimately, we must ask that fundamental question, “Is it time for a separation of state and money?“
Donations
If you found value in this article please feel free to donate via the following payment methods:
CashApp: $JohnYoung357 
Venmo: @John-Young-359
Bitcoin: bc1qepkrxl73pr0q0087d5gyhnu9j80rkfnukq2zzt
End Notes, References, & Citations
[1] Keynesian economics
“Keynesian economics (/ˈkeɪnziən/ KAYN-zee-ən; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. It is influenced by a host of factors that sometimes behave erratically and impact production, employment, and inflation.“
“Keynesian economists generally argue that aggregate demand is volatile and unstable and that, consequently, a market economy often experiences inefficient macroeconomic outcomes, including recessions when demand is too low and inflation when demand is too high. Further, they argue that these economic fluctuations can be mitigated by economic policy responses coordinated between government and central bank. In particular, fiscal policy actions taken by the government and monetary policy actions taken by the central bank, can help stabilize economic output, inflation, and unemployment over the business cycle. Keynesian economists generally advocate a regulated market economy – predominantly private sector, but with an active role for government intervention during recessions and depressions.” [emphasis added by BitcoinInPeace.com] (Ref.: “Keynesian Economics“)
[2] Dopamine rush
“Dopamine is a hormone and a type of neurotransmitter, or chemical messenger, made in your brain. Your nervous system uses it to send messages between nerve cells. These messages also travel between your brain and the rest of your body.
This unique neurotransmitter affects your body, brain, and behavior. Dopamine plays a role in how we feel pleasure and rewards. It’s a big part of our unique human ability to think and plan. It helps us focus, work towards goals, and find things interesting.
Like most other systems in the body, you don’t notice it (or maybe even know about it) until there’s a problem.
Too much or too little dopamine can lead to many different health issues. Some are serious, like Parkinson’s disease. Others are less severe.“
“How Can Dopamine Affect the Body?“
“Dopamine is a neurotransmitter in your brain that contributes to feelings of alertness, focus, motivation, and happiness. A flood of dopamine can make you feel euphoric.“
“Dopamine is involved in neurological and physiological functioning. It’s a contributing factor in motor function, mood, and even our decision making. It’s also associated with some movement and psychiatric disorders.“
[3] Lake Wobegon Effect
Brave search engine summary “lake wobegone every child is above the rest“
“Lake Wobegon Effect
The Lake Wobegon Effect is a psychological phenomenon where individuals tend to overestimate their own abilities, achievements, and performance in relation to others. This bias was coined by Garrison Keillor, an American author and radio personality, who described the fictional town of Lake Wobegon as “where all the women are strong, all the men are good-looking, and all the children are above average.”
Real-Life Examples
- Self-Assessment: In a study, 94% of college professors reported doing above-average work, despite objective measures suggesting otherwise.
- Driving Skills: A survey found that 80% of respondents rated themselves in the top 30% of all drivers, despite objective data indicating that most drivers are average or below average.
- Student Test Scores: A study reported that all states claimed average student test scores above the national norm, a statistically impossible finding.
- Personal Traits: A College Board survey found that only 1% of high school seniors rated themselves as below average in getting along with others, while 60% rated themselves in the top 10% and 25% in the top 1%.
Why Does This Happen?
- Confirmation Bias: People tend to seek out information that confirms their positive self-image and ignore contradictory evidence.
- Lack of Objectivity: Individuals often lack a clear understanding of objective standards and criteria, leading to inflated self-assessments.
- Social Comparison: People compare themselves to others who are not representative of the average, leading to an exaggerated sense of superiority.
Consequences
- Misaligned Expectations: Overestimating one’s abilities can lead to disappointment and frustration when reality fails to meet expectations.
- Poor Decision-Making: Biased self-assessments can influence decisions, such as career choices or investments, leading to sub-optimal outcomes.
- Impaired Feedback: Resistance to constructive feedback and criticism can hinder personal growth and development.
Mitigating the Lake Wobegon Effect
- Seek Objective Feedback: Regularly solicit feedback from trusted sources, such as mentors, peers, or supervisors, to gain a more accurate understanding of one’s performance.
- Use Data and Metrics: Leverage objective data and metrics to evaluate performance and identify areas for improvement.
- Practice Humility: Recognize the limitations of one’s abilities and be open to learning from others and acknowledging mistakes.
By acknowledging and addressing the Lake Wobegon Effect, individuals can develop a more realistic and accurate self-image, leading to better decision-making, improved relationships, and greater personal growth.“
[4] Unit Bias
Brave search engine summary: “unit bias“
“Unit Bias
Unit bias is a cognitive bias where individuals perceive a single unit of an item as the appropriate amount to consume or use, regardless of the size or quantity of the unit. This bias can influence consumption behaviors, such as eating an entire serving of food even if it is large, leading to over-consumption. It also affects decision-making in various contexts, like choosing to buy a whole unit of a cryptocurrency instead of a fractional amount, which might not be the best financial decision. Understanding and recognizing unit bias can help in making more rational choices and managing consumption more effectively.
Examples:
- Food consumption: People tend to finish a whole serving of food, even if it’s larger than they intended to eat, due to the perceived need to complete the unit.
- Candy consumption: Research has shown that individuals consume more candy when served with a large spoon than with a small spoon, despite having no limits on the amount they can take.
- Resource consumption: Unit bias can also apply to non-food items, such as water or energy usage, leading people to use more resources than necessary because they perceive a single unit as the standard amount.
Implications:
- Over-consumption: Unit bias contributes to over-consumption of food, leading to negative health consequences, such as obesity and related health issues.
- Marketing strategies: Businesses often leverage unit bias by packaging products in larger sizes, encouraging consumers to complete the unit and potentially leading to over-consumption.
- Environmental impact: Unit bias can also contribute to wastefulness and over-consumption of resources, such as water and energy, with negative environmental consequences.
Research and theories:
- Unit segmentation: Researchers have demonstrated that dividing food into smaller units (e.g., smaller portions) can reduce consumption and promote healthier eating habits.
- Consumption norms: The unit bias may be influenced by cultural and social norms around consumption, with individuals conforming to perceived standards of appropriate consumption.
- Heuristics: The unit bias can be seen as a mental shortcut or heuristic, where individuals rely on the perceived completeness of a unit rather than considering their actual needs or preferences.
Strategies to overcome unit bias:
- Portion control: Encourage individuals to consume smaller, more manageable portions to reduce over-consumption.
- Labeling and education: Provide clear labeling of serving sizes and educate consumers about the unit bias to promote more mindful consumption.
- Alternative packaging: Design packaging that encourages more flexible or adjustable consumption, such as refillable containers or portion-controlled packaging.
By understanding the unit bias and its implications, we can develop strategies to promote healthier and more sustainable consumption habits.“
What Is Unit Bias In Behavioral Economics? “What Is Unit Bias?“
“Unit bias is a psychological heuristic in behavioral economics, suggesting that individuals perceive a single unit of an item, regardless of its size, as the appropriate amount to consume or use. It is an inclination towards thinking of things in discrete, indivisible units, leading people to believe that a unit is a representative amount, optimal serving size, or appropriate action quantity.“
“Unit bias. A new heuristic that helps explain the effect of portion size on food intake“
“Abstract
People seem to think that a unit of some entity (with certain constraints) is the appropriate and optimal amount. We refer to this heuristic as unit bias. We illustrate unit bias by demonstrating large effects of unit segmentation, a form of portion control, on food intake. Thus, people choose, and presumably eat, much greater weights of Tootsie Rolls and pretzels when offered a large as opposed to a small unit size (and given the option of taking as many units as they choose at no monetary cost). Additionally, they consume substantially more M&M’s when the candies are offered with a large as opposed to a small spoon (again with no limits as to the number of spoonfuls to be taken). We propose that unit bias explains why small portion sizes are effective in controlling consumption; in some cases, people served small portions would simply eat additional portions if it were not for unit bias. We argue that unit bias is a general feature in human choice and discuss possible origins of this bias, including consumption norms.“
“What is Unit Bias In Behavioral Economics?“
“At the heart of unit bias is the notion of what is perceived as a ‘normal’ or ‘standard’ amount. This bias influences people to view a single unit as an appropriate, acceptable, or normal amount, regardless of the unit’s size or quantity.“
“Unit bias. A new heuristic that helps explain the effect of portion size on food intake“
“Unit Bias a cognitive bias that causes our misguided brains to constantly oversimplify the world. It causes our overworked brains to group things into big general categories and to ignore the subtle differences.“
[5] Portfolio returns calculations
Calculating the Total Returns of our hypothetical portfolio:
Inputs:
- Compounding Periods = 40 years
- Average Annual Rate of Return = 5% = 0.05
Total Returns:
- ((1 + Ave. Annual Rate of Return) ^ Compounding Periods) – 1) = Total Returns
- ((1 + 0.05) ^ 40) – 1) = 6.04 = 604%
[6] Real returns / inflation adjusted
Brave search engine summary: “real returns”
“Real Returns
Real returns refer to the actual rate of return on an investment after adjusting for inflation. In other words, it measures the increase in purchasing power of an investment over time. Nominal returns, on the other hand, do not account for inflation and may overstate the true return on investment.
Calculating Real Returns
To calculate real returns, you need to subtract the inflation rate from the nominal return. The formula is:
- Real Return = (1 + Nominal Return) / (1 + Inflation Rate) – 1
For example, if the nominal return is 5% and the inflation rate is 3%, the real return would be:
- Real Return = (1 + 0.05) / (1 + 0.03) – 1 ≈ 2%
This means that the investment’s actual purchasing power has increased by 2% over the period.
Why Real Returns Matter
Real returns are crucial for investors because they help:
- Preserve Purchasing Power: Inflation can erode the value of money over time. Real returns ensure that investments keep pace with inflation, maintaining purchasing power.
- Accurately Evaluate Performance: Nominal returns can be misleading, as they don’t account for inflation. Real returns provide a more accurate picture of an investment’s performance.
- Make Informed Decisions: By focusing on real returns, investors can make more informed decisions about their investments, portfolio allocation, and long-term financial goals.
Real Returns in Different Asset Classes
- Bonds: Real returns on bonds are particularly important, as inflation can significantly impact their value. Historically, bonds have offered lower real returns than other asset classes, such as stocks.
- Stocks: Equities have historically provided higher real returns than bonds, but their returns can be more volatile.
- Real Estate: Real estate investments, such as rental properties or real estate investment trusts (REITs), can provide higher real returns than bonds, but are often subject to local market conditions and property-specific risks.
Conclusion
Real returns are a critical consideration for investors, as they help preserve purchasing power, accurately evaluate investment performance, and inform decision-making. By understanding real returns, investors can make more informed choices about their investments and achieve their long-term financial goals.“
“Real return is what is earned on an investment after accounting for taxes and inflation. Real returns are lower than nominal returns, which do not subtract taxes and inflation.“
“Real Rate of Return: Definition, How It’s Used, and Example“
“The real rate of return is the annual percentage of profit earned on an investment, adjusted for inflation. Therefore, the real rate of return accurately indicates the actual purchasing power of a given amount of money over time.
Adjusting the nominal return to compensate for inflation allows the investor to determine how much of a nominal return is real return.“
[7] 40 year erosion calculation
Inputs:
- Compounding Period = 40 years
- Erosion Rate = –5.6%
- S&P500 Rate of Return = 5%
Calculation:
- Real (Inflation Adjusted) Rate of Return =
- S&P500 Rate of Return + Erosion Rate
- 5% + (-5.6%) = –0.6% = –0.006
- Net (Inflation Adjusted) Principle =
- (1 + Real Rate of Return) ^ Compounding Period
- (1 + –0.006) ^ 40 = 0.7861 = ~79%
- ~79% principle remaining (on an inflation adjusted basis)
[8] “bread and circuses”
Brave search engine summary “bread and circuses“
“Bread and Circuses Meaning
The phrase ‘bread and circuses’ originates from ancient Rome, specifically from the Roman satirist Juvenal’s 10th Satire, written around 100 AD. In this context, Juvenal lamented the decline of civic virtue among the Roman populace, who were more concerned with basic sustenance (bread) and entertainment (circuses) than with participating in the democratic process and upholding their civic duties.
Ancient Rome’s Bread and Circuses
During the Roman Empire, the government used a combination of food handouts (bread) and public spectacles (circuses) to pacify the population and distract them from political unrest and civic responsibilities. This strategy allowed the ruling elite to maintain control and stability, albeit at the cost of democratic freedoms.
Modern Relevance
The concept of “bread and circuses” has transcended its ancient roots, becoming a metaphor for governments and institutions using short-term solutions to appease the masses, rather than addressing deeper issues and promoting civic engagement. This phenomenon is evident in various forms of modern entertainment, propaganda, and political manipulation.
Examples
Ancient Rome’s Colosseum: A symbol of bread and circuses, where gladiatorial combat and other spectacles entertained the masses, diverting attention from political and social issues.
Modern Politics: Governments using populist measures, such as handouts or symbolic gestures, to maintain public approval and deflect attention from more pressing concerns.
Media and Entertainment: The proliferation of reality TV, social media, and other forms of distraction, which can pacify the public and reduce their willingness to engage with complex political issues.
Conclusion
The phrase ‘bread and circuses’ remains a powerful reminder of the enduring struggle between civic virtue and political manipulation. As we navigate modern societies, it is essential to recognize the ongoing relevance of this ancient concept and strive for a balance between short-term appeasement and long-term civic engagement.“
” ‘Bread and circuses‘ (or “bread and games“; from Latin: panem et circenses) is a metonymic phrase referring to superficial appeasement. It is attributed to Juvenal (Satires, Satire X), a Roman poet active in the late first and early second century AD, and is used commonly in cultural, particularly political, contexts.
In a political context, the phrase means to generate public approval, not by excellence in public service or public policy, but by diversion, distraction, or by satisfying the most immediate or base requirements of a populace, by offering a palliative: for example food (bread) or entertainment (circuses). Juvenal originally used it to decry the “selfishness” of common people and their neglect of wider concerns. The phrase implies a population’s erosion or ignorance of civic duty as a priority. “
[9] August 15, 1971 – Richard Nixon Closes the Gold Window
The Challenge of Peace – President Nixon’s Address to the Nation on A New Economic Policy
[10] Gold standard
Brave search engine summary: “what is the gold standard“
“What is the Gold Standard
The gold standard is a monetary system where a country’s currency value is directly linked to gold. Under this system, the government sets a fixed price for gold and agrees to convert paper money into gold at that price. For instance, if the price of gold is set at $500 per ounce, the value of the currency would be 1/500th of an ounce of gold. This system was used historically but was abandoned by most countries by the 1970s, with the United States ending its use in 1971. Today, currencies are typically fiat money, which means their value is not backed by physical commodities but is established by government decree.“
“What Is the Gold Standard? History and Collapse“
[Note: Excerpts specifically chosen by BitcoinInPeace.com]
“The gold standard is a monetary system in which the value of a country’s currency is directly linked to gold. With the gold standard, countries agree to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a price for gold, and it buys and sells gold at that price.“
“That fixed price is in turn used to determine the value of its currency. For example, if the U.S. hypothetically set the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.“
“The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of imperfect human beings. With the physical quantity of gold acting as a limit to issuance, a society can potentially avoid the perils of inflation.“
“The gold standard was also an international standard determining the value of a country’s currency in terms of other countries’ currencies. Because adherents to the standard maintained a fixed price for gold, rates of exchange between currencies tied to gold were necessarily fixed. For example, the United States fixed the price of gold at $20.67 per ounce, and Britain fixed the price at £3 17s. 10½ per ounce. Therefore, the exchange rate between dollars and pounds—the “par exchange rate”—necessarily equaled $4.867 per pound.
Because exchange rates were fixed, the gold standard caused price levels around the world to move together. This co-movement occurred mainly through an automatic balance-of-payments adjustment process called the price-specie-flow mechanism. Here is how the mechanism worked. Suppose that a technological innovation brought about faster real economic growth in the United States. Because the supply of money (gold) essentially was fixed in the short run, U.S. prices fell. Prices of U.S. exports then fell relative to the prices of imports. This caused the British to demand more U.S. exports and Americans to demand fewer imports. A U.S. balance-of-payments surplus was created, causing gold (specie) to flow from the United Kingdom to the United States. The gold inflow increased the U.S. money supply, reversing the initial fall in prices. In the United Kingdom, the gold outflow reduced the money supply and, hence, lowered the price level. The net result was balanced prices among countries.“
“A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves.“
[11] www.WTFHappenedIn1971.com
Historical Note: There are over 80 charts on this website which show that inflating the money supply and disconnecting our monetary system from reality damages our country and culture so broadly. I recommend everyone take a serious look at the site and try to comprehend just how broad and pernicious the effects are when the state interferes with our lives.