How to protect against inflation – UFOs to the rescue
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Let’s return briefly to the topic of how money work, and especially to inflation.
To prevent bankruptcies in financial institutes and later to boost the economy during the pandemic and prevent company closures, central banks have issues massive amounts of new money to the markets in a variety of formats called quantitative easing, recovery plans, stimulus packages etc all around the world. This influx of money naturally creates inflation that weakens the citizens’ purchasing power as salaries raise at much lower rate than inflation runs. Printing money is really a form of taxation. Even the risk of hyperinflation and stagflation have been mentioned.
There is one mechanism that can be used by citizens’ and enterprises to protect against the ill effects of inflation. This was first invented in Chile, which at the time has struggling under strong inflation.
1967 Unidad de Fomento (UF) was created. It is a non-circulating currency and its rate against national currency is constantly adjusted against national currency based on inflation. The idea is that the purchasing power remains the same in terms of national currency. When a contract is made in terms of UF, the rate you get paid in national currency changes regularly.
First used to determine the principal (loan amount) and interest in international secured loans but soon extended to cover all types of bank loans, private financing, purchases and investments on instalments, contracts etc.
Similar virtual currency is used in Mexico and its called unidad de inversión (UDI), literally "investment unit".
Now in Euro area under heavy inflation, a similar virtual currency can be created. Lets call it Unit of Fiat Observation (UFO). When contract like rents, salaries, farmers upcoming harvest are traded in UFOs the actual amount in Euros will be calculated based on inflation since the contract date.
Under this scheme the central bank can issue as much new money in terms of stimulus or whatever they want to call it. UFOs guarantee that as the price of goods raise, salaries and pensions automatically raise at the same rate, keeping peoples purchasing power constant.
For more:
https://en.wikipedia.org/wiki/Mexican_unidad_de_inversi%C3%B3n