Federal Reserve Bank of New York — Source:Fortune.com

The US Dollar works well. In some ways…

If you are living in the United States and want to buy something, I could not think of a better way (even with over 2,000 crypto assets at the disposal).

If I buy a cup of coffee today, I can be almost 100% certain that, barring any major technological changes, it will not cost less a few years from now. This makes the decision easy: Spend money today with almost 100% certainty that the USD I spend today will not purchase me more goods and services a few years down the line.

What the US Dollar does not work well for is preserving wealth for future purchases.

With an inflation rate (defined as a general increase in prices) that has averaged about 3.1% since 1913 in the US, each year that I leave my hard earned cash sitting in a savings or checking account (which almost certainly bears close to 0% interest in 2018), I become poorer.

Prices of goods and services go up and if I am not earning a return that beats these increases, I afford less and less goods each year.

Even if I put my money into a low risk bank CD which yields about 2% interest in 2018, I am forced to lock up these funds and will still be fighting to beat inflation.

The question for anyone trying to create a true cryptocurrency replacement for government issued fiat currencies should be:

How do we create a cryptocurrency that both:

1) Encourages expenditure today, thus stimulating economic activity (coffee example)

2) Preserves wealth for purchases tomorrow

The answer is that no one can or ever will be able to create such a currency.

And if one could, central bankers would have already found a way to do so. (Contrary to popular belief, they too see the prices of the goods they buy go up and equally dislike it).

If central bankers could find a way to make the prices of goods go down each year while keeping the economy on course, they would. This would make themselves and everyone else richer year after year.

The reality is that goods getting cheaper and cheaper over time kills economic growth and can have disastrous consequences.

If I suspect that coffee could be 10% cheaper next year, I have an incentive to wait and buy the coffee later.In isolation, this is not the end of the world.In fact, my desire to drink the coffee now may be sufficient for me to buy it today even though I know it will be cheaper next year.

But what about the owner of the coffee shop? What if they are considering investing in a new espresso machine today, but figure that the machine could be cheaper next year and decide to defer the purchase?

Sure, they can continue operating the coffee shop and servicing customers, but what about the manufacturer of the espresso machine? They have now lost business and have two reasons not to invest in new equipment for their business:

They have less money to invest in new equipment because the coffee shop did not purchase their espresso machine. They would be better off waiting until prices of the new machinery come down further.

As these effects ripple through the economy, the spiral continues. Decreasing prices destroy incentives to spend. Reduced spending translates to lower incomes which translate to even less spending.

So no, the Federal Reserve and any other credible central bank for that matter is not trying to defraud us by printing money. What central bankers have learnt over time is simple:

Deflation is to be avoided at all costs.

High and variable inflation is bad.

Low and stable inflation is desirable.

The goal of any well-functioning central bank is first and foremost to ensure a stable flow of spending in the economy. Inflation is the cost of doing business.