Inflation: The silent theft of money.

Every worker on this planet (no exceptions) has the feeling that we are constantly becoming poorer. Ever since I started working, I’ve had the exact same sensation: it doesn't matter if I earn more, in the end, I always buy less. Paradoxically, every year we have more, yet we have less. But why do we have this feeling? On one hand, we have all the price hikes that happen due to bankruptcies, pandemics, and wars. Theoretically, those are temporary and should be resolved once the conflict ends (the fact that this doesn't actually happen is another matter, but that’s the theory). Then, there is the final boss—that silent, inexorable, and extremely dangerous enemy created by politics itself, which destroys everything we work hard for: inflation.

We hear about it on television, radio, and the internet, and we read about it everywhere when the economy is discussed. Everyone "worries" about inflation and keeping it under control. Today I want to talk about it, because it is something that has always existed and has conditioned—even in a historical manner—an entire continent, if not the entire world.

What is Inflation?

Inflation is the inevitable, automatic annual increase of almost any price by a certain percentage. Why do prices increase automatically? You might be asking yourself. And it is a more than legitimate question. After all, if an apple cost 2 yesterday, why should it cost 2.1 the following year? If the production, the people, the transport, and the retail sale have remained the same, why does the price go up? If we think about it, if I have a hundred grams of salad in my house, it doesn't suddenly become a hundred and ten grams tomorrow.

Don't worry, it’s not magic and it’s not a scam. It is simply the monetary system constantly losing value. What does monetary policy have to do with it? Well, the money we use every day is the true reason why we have inflation. While they officially tell us that inflation is just the increase in prices, the reality is that it is the inevitable consequence of the increase of money in circulation and its devaluation. Why does money increase and decrease in value?

If you didn't know it, now you do: even money is regulated by supply and demand. What we have in our wallets and bank accounts is not something abstract; it follows the same rules as a chair or a kilo of bread.

To explain this mechanism, one must distinguish between "nominal value" and "purchasing power." Nominal value is what is written on the banknote: a 5-euro bill will always be 5 euros. It is a constant. What changes is the purchasing power—that is, how much you can actually buy with that piece of paper.

Take, for example, a one-euro coin. It has a nominal value of 1 (one dollar or one euro). If there is a high demand for money but low supply (little money in circulation), the currency becomes a precious commodity that is worth a lot. In this condition, with 1 euro you could buy, let's say, ten apples. It’s not that the producer became generous: simply, the money is "rare," so it has more value and buys more.

Conversely, if there is too much supply (a lot of money in circulation) relative to demand, the value of that money drops because that currency becomes an abundant commodity. In this case, with the same euro, you would only buy 2 apples.

Therefore, the more money circulates, the less rare that money will be; consequently, it will cause prices to rise because it is a commodity found everywhere, and thus the purchasing power of each of us will decrease.

Today we find ourselves in a situation where the creation of new money must "chase" an increasingly high demand. Without getting into impossible technicalities, what matters is that every year new money is created out of thin air because banks and credit institutions demand money. The effect is inevitable: money becomes abundant, therefore less rare, and as a result, it loses value. This causes the prices of everything we buy to rise, even if nothing has changed in production.

It is not the apple that is worth more; it is your money that is worth less.

Why Do We Have Inflation?

Let’s debunk a myth that is hard to beat: inflation has always existed. Ever since we have had currency, we have had inflation. Perhaps it was manageable, but there have been cases, even severe ones, of hyperinflation.

The Roman Empire.

Let's start with the Roman Empire. Even the greatest kingdom of the ancient world had problems with inflation. Roman emperors had to pay soldiers and the expenses of the empire. We are talking about thousands of men and a territory that stretched from Italy to England. What they wanted to achieve was to cover expenses without raising taxes (which would have been unpopular). Therefore, they invented a trick: currency debasement.

They simply took silver coins (the Denarius), melted them down, and added less noble metals like copper. The stroke of genius—which later proved to be a disaster—was that from one pure silver coin, they managed to mint two or three "silvered" ones. The theory was: same coin, same value. Not quite. The emperors managed to pay off debts without taking more money from citizens. This, however, devalued the currency because merchants raised prices, having the feeling that a lot of wealth was circulating (when in fact, only a lot of coins were circulating). Under Emperor Diocletian (301 AD), inflation was so high that they had to issue an "Edict on Maximum Prices" to try (unsuccessfully) to stop it.

The Modern Age.

Many centuries pass and we have the second moment of inflation. We are in the modern era. Great explorations were in full swing and the holes on the map were getting smaller. When Columbus discovered America, he returned to Spain not only with fruits and vegetables never seen before, but with three ships full of gold. Spain saw the business, sent the conquistadors to raid those territories, and began importing tons of gold and silver into Europe. With so much gold, rulers and bankers thought they could create coins without limit. Suddenly, the "quantity of money" became an unstoppable flood. Gold and silver became less "rare," almost just simple pieces of metal. Throughout Europe, the prices of basic necessities (grain, meat) tripled or quadrupled in a few decades because there was a perception that "gold was worth little." It was the first time inflation hit an entire continent due to an abundance of metals.

China.

Let’s move to Asia, because they also had their fair share of currency problems. We are in China, and the empire saw the first case of modern inflation as we know it. For convenience, in parts of Asia, the empire began printing paper that "represented" the value of iron or copper. Essentially, instead of carrying around iron and copper, which were bulky and heavy, the State said, "this piece of paper is worth a certain amount of iron and copper that we keep somewhere."

It seemed like a great plan, and indeed it was, because that piece of paper had a value backed by physical reserves. That is, until the State needed money for wars. When it had to support the army at war, China committed a massive error: instead of accumulating iron and copper and then printing banknotes, it began printing money without having enough metal for coverage. The paper very quickly became scrap, prices exploded, and the system collapsed.

Germany.

The first is Germany—or rather, the Weimar Republic. It was the early 1920s. The first war had ended, and the Weimar Republic emerged from the global conflict broken. Essentially, the future Germany was declared guilty of everything (even though WWI broke out due to crazy alliances and pacts) and, among many things, it had to repay all the war debts of all the winning nations.

Those debts were so high that, with industrial production alone, the Weimar Republic would never have been able to pay reparations, salaries, and keep all infrastructure functioning. So they started printing money, not out of delusions of grandeur, but for simple survival: too much debt and an economy too weak to keep standing and eventually help.

The consequence was singular: the currency lost value so fast that prices doubled every few hours. People went to buy bread with wheelbarrows full of banknotes.

Just to let you understand how devastating inflation can be, here is the escalation of the price of half a kilo of butter (about a German pound) in 1923:

January 1923: about 2,300 marks.

July 1923: about 200,000 marks.

September 1923: about 2,000,000 marks (2 million).

October 1923: about 6,000,000,000 marks (6 billion).

November 1923 (the peak): about 210,000,000,000 marks (210 billion).

It was cheaper to burn banknotes for warmth than to buy wood. This event traumatized Germany to such an extent that when Hitler ran for office, even though his ideas were insane, he was voted in, triggering all the delirium of the 20th century.

Just to give you some perspective, in the 90s, Milan, Real Madrid, or Manchester United were worth "only" a few hundred million dollars. With 210 billion, you could buy all the teams in all the major European leagues (Serie A, Liga, Bundesliga, Premier League) and have 95% of the sum left over. The market value (capitalization) of companies like Volkswagen or BMW was far lower than 210 billion. With that figure, you could buy both companies and still have enough money left over to give a new car to every German citizen. Furthermore, with 210 billion marks, you could entirely cover the foreign debt of several developing nations or finance the reconstruction of half of Eastern Europe after the fall of the Berlin Wall.

America and Modern Times.

Given the German disaster, for decades currency was always linked to a material: gold. For decades, for every dollar in circulation, there was a corresponding value in gold kept in banks or places not accessible to the public (like Fort Knox).

Until the middle of the 20th century, the value of the dollar (and therefore other currencies) was still tied to gold. Every dollar printed had to have a gold equivalent in the vaults. At a certain point, on August 15, 1971, US President Richard Nixon announced that the dollar would no longer be convertible into gold. The idea was to create money to pay the debts America had accumulated up to that point. From then on, money became "fiat" (from the Latin "let it be done"), meaning money created by decree, without any physical asset to guarantee it. This gave central banks the unlimited power to increase the money supply, paving the way for constant inflation.

From that moment on, all other states implemented this strategy, inflating their currencies. Now it is just a matter of accepting inflation and understanding both how it works and how to fight it as a private citizen.

Why Do the Power and the People Accept Inflation?

It seems paradoxical, but no one in power wants prices to go down. Those who govern and manage central banks are terrified of deflation—that is, when prices fall. The reason? It’s a psychological issue: the idea is that if the population knows a car will definitely cost less tomorrow than today, they will postpone the purchase, slowing down consumption. This activates that apocalyptic scenario where everyone postpones purchases knowing the price will drop, companies stop selling, so they lose money, they lay people off, unemployment is created, and the economy collapses. Essentially, what would be good for the population (prices falling) is not good for those who control the economy, because they want prices to grow, being terrified that more purchasing power is an evil.

However, high inflation isn't positive either, because it would drastically burn everyone's purchasing power. What was devised is light and constant inflation (usually 2%) that acts as an incentive for the economy. Knowing that prices will rise pushes you to spend or invest your money today because you are certain that tomorrow your money will be worth less. It is a forced incentive for consumption.

Inflation is also the best friend of those who owe money.

Imagine that the State has a debt of 100 billion. To repay that 100 billion, the State had to use, let's say, 20% of all taxes collected in a year. If inflation doubles prices and salaries, those nominal 100 billion become much easier to repay, since prices and salaries have doubled and tax revenues have doubled. Those 100 billion of debt (which remained fixed) now weigh only as 10% of the State's income.

Since almost all modern States are heavily indebted, inflation is a "silent" way to devalue public debt without having to make painful cuts or explicitly raise taxes, knowing that every year they would "gain" 2%.

Inflation makes us feel psychologically good. It sounds incredible, but it's true. If your boss told you, "This year I'm cutting your salary by 2% because the cost of living has decreased," you would be very angry. We human beings react much worse to a salary decrease than to a price increase. We are okay with prices increasing because salaries increase accordingly. Without inflation, salaries would always be the same, because there would be no reason to raise them. An employer does not give away more money to a worker without a reason... and no, your performance at work doesn't count.

Why is 2% So Important?

When we talk about inflation, we always talk about keeping it within 2%, because it is considered sustainable inflation. The comic aspect is that the choice of 2% is not based on a universal mathematical law or an absolute scientific truth. It is, to a large extent, an arbitrary convention that has become the global standard.

The 2% target was born almost by chance in New Zealand in 1988. The Minister of Finance at the time, during a television interview, said he wanted to bring inflation between 0% and 1%. Later, New Zealand central bank technicians thought that 0% was too rigid and chose a range around 2%. Since the experiment seemed to work to stabilize the economy, the Federal Reserve (USA) and the ECB (Europe) copied the idea in the 90s and 2000s, making it a worldwide dogma.

Why not go to 0 percent? I mean, there would be nothing wrong with having stable prices, right? Yes and no. Economists dream of stability (0% inflation), but 0% is equally considered dangerous. If inflation were at 0% and the economy slowed down even a tiny bit, you would immediately end up in deflation (prices falling).

2% is considered a margin of safety: far enough from zero to avoid deflation, but low enough not to destroy purchasing power too quickly.

Imagine now if inflation were at 10 percent. If it were that high, every one of us would panic and stop buying because we'd be worried about our savings, and the economy would become unstable. At 2%, you perceive that money "burns" very slowly—because we are not idiots—which gives you time. You don’t run out to spend everything immediately, but you know that keeping money under the mattress for 20 years is a terrible idea. This keeps money moving, with low-risk and long-term investments.

Can It Be Fought?

The most classic way is to exchange currency (which is infinite and can be created from nothing) for assets that have physical scarcity.

Buy Reality.

In this case, you can buy something that increases in value over time.

Gold is the perfect example. It has been the ultimate safe-haven asset for millennia. It cannot be printed, so it tends to maintain its purchasing power in the long run. In times of crisis, financial markets exchange certificates linked to gold, driving the price up speculatively. In that case, you sell at the peak of the bubble, wait for the price to crash, and buy even more gold.

Or you can focus on real estate. Bricks don't disappear. Real estate is useful for two reasons: prices rise constantly due to negotiations always trending upward—partly due to inflation—and, in the case of rentals, if inflation rises, rents usually rise too. Those who own rentals not only cover themselves from inflation but profit beyond it.

Commodities like oil, copper, and wheat. If prices increase, those who own the raw material are protected because they are the ones who "dictate" the price. 2026 is textbook in this sense.

The Stock Market.

Stocks are not just bets; they are ownership stakes in companies. The great advantage is that if inflation rises, a strong company (Apple, Coca-Cola, or Nestlé) simply increases the price of its products, so profits, earnings, and dividends to shareholders increase. Not only that, but stock values tend to follow this growth. In practice, the company "flips" inflation onto the final consumer, protecting the shareholder who wins twice—both on dividends and on the stock value.

Inflation-Indexed Government Bonds.

The government bond is something ancient but always effective. There are bonds created specifically for small savers that "move" along with inflation. These bonds pay a coupon that automatically adjusts based on price increases. If inflation is at 5% but you bought it when it was at 2%, your yield rises accordingly. It’s as if your ruler stretches along with what you have to measure. There is a reason why many states sell government bonds from countries with 25 percent inflation or more. They don't do it out of fear, because the State doesn't lose money; it's just that losing a return of 15-20 percent would be a crime.

Bitcoin and Digital Scarcity.

Since 2024, many see Bitcoin as a digital version of gold. Why? Because, unlike the Euro or the Dollar, Bitcoin's code stipulates that no more than 21 million will ever exist. There is no monetary policy or central bank that can "create them out of thin air" to satisfy a demand. Its scarcity is mathematical and immutable. Now, since it is still being "created," there might be some devaluation due to low demand and high supply. In the future, no one will produce Bitcoin; the purchase of Bitcoin will be higher than the production of the digital currency, creating a supply shock which, if added to high demand (typical of a speculative bubble), could lead to returns far beyond a mere 2 percent.

Final Reflections.

Inflation is often described as an inevitable economic phenomenon, as if it were a law of nature like gravity. In truth, it is more like a political and systemic choice. It is the price we pay to keep a system based on debt and perpetual growth standing.

The real lesson is not that the world is ending, but that the rules of the game have changed. Once, saving was a virtue: you put money under the mattress or in a savings account and time worked for you. Today, in a regime of "fiat" money created from nothing, saving without investing means accepting a guaranteed loss.

We cannot stop the central banks' printing presses, nor can we change the decisions made in Washington or Frankfurt. What we can do is change the way we manage what we earn.

First, you must understand what you have in your hand. What matters is what you can put in your shopping cart, not how many banknotes you have in your wallet.

And then, you must grow your capital enough to cover that 2%. You must seek scarcity, because in a world of digital and monetary abundance, true wealth moves toward what is scarce, finite, and difficult to produce. And you have to understand how the world works, especially when it comes to money, so that you know what to do to overcome it.

Inflation is an invisible tax that rewards those who own assets and punishes those who only own paper. It is neither good nor bad: it is simply the way the current system breathes. Once you understand how it works, you can stop being the victim of this mechanism and start protecting the fruit of your labor.

M.