I decided to write a short introduction to the fiat economy to give more context on why investing—not saving—is essential for building wealth. In case you missed it, you read the first article here.
Our economy is mostly imaginary.
Once upon a time, every currency in the world was backed by gold—the so-called “gold standard.” Gold was chosen because it cannot be created or faked. Its purity is easy to test, and its weight is known and consistent. Gold is limited in supply, and those same reasons explain why Bitcoin is considered valuable today.
Paper currency was originally developed to simplify the process of trading gold. Carrying and transporting gold securely was inconvenient and risky, so paper IOUs became common, backed by reserves of gold stored in vaults.
Then, in 1971, President Richard Nixon officially ended the gold standard in the United States and stopped trading internationally with gold. From that point on, the dollar became a fiat currency—meaning it no longer represented a tangible asset like gold. In fact, it is now illegal to use gold as legal tender in the U.S., although gold still retains value and is often traded privately.
In a fiat economy, money only has value because the government says it does. The U.S. dollar is backed not by gold, but by trust in the U.S. government and its ability to manage the economy. The amount of money in circulation is controlled by the Federal Reserve—a private institution, not a government agency—which has the exclusive authority to print legal tender.
Even more troubling, the government authorizes banks to create loans without printing new money. If you’ve ever wondered why banks accumulate so much wealth, the answer is simple: they’re allowed to lend money that doesn’t exist—created digitally—and then charge you interest on it. This is called “fiat fractional reserve banking system.”
The government “injects” money into the economy by paying salaries, offering contracts, or providing low-interest loans. It then collects taxes to recapture some of that money. But here’s the troubling part: if your wealth is mostly in cash, you’re at the mercy of these decisions.
In order to “grow the economy,” the government targets a steady inflation rate—usually 2–3% per year. This means that to maintain purchasing power, people must continually earn more money. As more dollars are printed and distributed, people can afford more, which drives demand. Increased demand allows businesses to raise prices, which in turn creates inflation.
So even if you feel like you’re earning more, you’re often just keeping pace with inflation. During the COVID era, inflation outpaced wage and asset growth, and most people felt poorer despite nominal increases in income.
To actually grow wealth, your income or asset growth must outpace inflation.
Money is a representation of time. You spent time doing something productive, and someone paid you for it. When you spend money, you are exchanging time. That’s why people say, “Time is money.” But unlike money, time cannot be saved, recreated, or replaced. It just flows.
Once you understand that, a disappointing truth becomes clear: cash is the worst way to store wealth. It continuously loses value due to inflation. The best time to use cash is when you earn it—not to hoard it.
Thus, the rich always say, “buy assets.” In other words, you must invest your money if you ever want to retire.
The U.S. tax code is designed to encourage economic activity. When you earn money and then choose to sit on it, you slow the economy. That’s why income is taxed the moment it’s received. Keeping your money idle removes it from circulation and shrinks the economy, even if just slightly.
Of course, we all have bills and expenses, so the wheel keeps turning. But the broader point remains: if you’re storing wealth in cash, you’re fighting a losing battle.
The best strategy in a fiat economy is to keep your money invested. That’s where the concepts of realized and unrealized gains come in. In the context of the stock market:
On the flip side:
So how do the rich avoid taxes while building wealth?
They don’t realize gains. Instead, they keep their money in assets that grow over time. And when they need cash, they don’t sell—they borrow against their investments.
This is the strategy used by investors like Robert Kiyosaki of Rich Dad, Poor Dad fame. Understanding how debt fits into this strategy—and how it allows you to live well without ever selling your assets—will be the focus of the next article.