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A Trustless Life: How Financial Fraud Became The Prime Driver of Inflation

Posted 15 August 2017 A Trustless Life: How Financial Fraud Became The Prime Driver of Inflation
Written by Jon Gulson
Inflation originally referred to the amount of money in circulation, but is generally understood as the cost of living.

Classic economics conventionally believes high employment becomes inflationary as higher wages create higher demand and therefore higher prices (an inflationary spiral).

Sometimes referred to as the disease on money, inflation becomes destructive if allowed to run unchecked. What is meant by ‘shortening the business cycle’, is to increase interest rates and remove money from circulation so inflationary pressures are eased.

The Acceleration of Knowledge

Today’s world is different. We live with low inflation, high employment and low interest rates. So what explains the break with the past?

The answer is technology and so many things being done via mobile devices or automation, with storage and computing costs a fraction of what they were two decades ago.

Take the iPhone: in 1991 it would be worth $1.44 million per phone to perform today’s functionality (an iPhone is not just a phone – it also works as a camera, television, clock, wallet, bank, radio, computer and more).

This means the consumer can live easier for less (reducing wage pressures) as the benefits of technology are distributed, whilst the producer has less demand for more traditional items. 

And it is not just technological products which are causing disruption: other industries are experiencing disruption as accelerations in knowledge translate into time saving and cost reducing benefits.

The problem however is these advances are not producing productivity or wage growth; creating an incentive for people to cheat (the system) in order to get ahead or survive.

Financialisation v Blockchain

The reason for low growth (and why inflation hasn’t totally disappeared) is the hangover from the financial crisis of 2007/08 which created easy money and suffered from friction in the legacy financial system. 

Financial Crash 2008

This friction is explained not only in energy expended to process transactions; but in mediating disputes where trust breaks down or has broken down between counterparties.

The problem of chargebacks, fraud and financial crime are ongoing issues for both financial institutions and consumers because costs are eventually passed on in fees and charges.

This has the effect of localising inflation to those who can least afford it.

This is why financial institutions are investing heavily into blockchain technology – they can see how automated and frictionless payments reduce costs and make them more efficient. 

However this presents the challenge of dis-intermediation and whether this is entirely possible where fraud and chargebacks (the arbitrating of reversible payments) are considered inevitable (where irreversible payments are not possible)?

Hopefully this can be resolved, because the opportunity with blockchain is distributing the benefits of technology and trustless money; eliminating completely inflation and restoring natural growth to the all-encompassing demographic.

Written by Jon Gulson
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