fiat currency
- By:
- NimanKenkre
- Dated:
- 11 Jun, 2011
As everyone knows, the United States economy is in a total shambles. However, what many people do not realize is that in the direction that we are headed, we could be in for a complete currency collapse. With the national debt getting close to 15 trillion dollars now, and being very close to the debt ceiling, the fact of the matter is that something has to be done - and we, as US citizens are going to pay the price for the economic irresponsiblity that our government has indulged in. I could talk about this forever, but I'd like to talk specifically about one (of many interrelated) aspects of the problem. That is the issue of our currency not being backed by anything, and being essentially a fiat currency. The implications of this could be disastrous.
Before I get into the teeth of this, let me give a poker analogy. If you go to a casino today, you exchange your cash for chips. You then use those chips not only to play poker, but if you wish, you can use them to pay for dinner at the casino, to pay for a massage at the table, to pay/tip for drinks, and basically to buy anything you want that is owned or operated by the casino. At the end of your stay in the casino, you can exchange your chips back for cash (at the same rate that you exchanged the cash for chips), leave the casino, and return to the rest of the world. You could also if you wish keep your chips, keeping them for your use for when you return to that casino next. The reason that this all works is that the chips in the casino - i.e. the casino currency - are backed by the United States dollar. In other words, the chips in the casino represent actual dollars. The actual chips are only a way of representing the amount of money that you are in possession of in a less bulky, easier-to-handle way. Because of this, you can exchange your chips for dollars and vice-versa without fear, and you can pay for anything (charged in dollars) with chips.
Now imagine for a minute that the casino decided to go off of the dollar standard. The chips are no longer backed by anything and are an independent entity. Now all of a sudden, the casino is in complete control. They can manufacture any number and monetary amount of chips that they choose to, since they no longer represent the dollar in a direct translation. Of course now, if the casinos manufacture and distribute more and more chips, the value of the actual chips in your possession go down accordingly. That is simple math - and the concept of inflation.
Meanwhile, as the valuation of the casino chips go down, and merchants realize that they can go down arbitrarily (as the casino decides to make more irrespective and independent of the actual US dollar), you will no longer be able to pay for a $5 drink with a $5 chip. They will insist that you pay with actual dollars, since the chip may not (probably will not) have the value that it is attempting to represent.
Of course, while this would cause some inconveniences and also some devaluation of your 'money', it can get worse. If the casino keep manufacturing chips indiscriminately, not only will the value of the chips drop so much that you and the other casino patrons(with outside currency - be that the dollar or anything else) will be hesitant to exchange it for chips (whose value will continue to decrease), but eventually if it gets bad enough, there will be a panic among all those people that have a large percentage of their money in casino chips. As a large number of people start realizing the arbitrary valuation of their currency, they will try to get rid of them for actual dollars. Eventually, no merchants will accept chips as payment, and if there is a run on the casino cage, people will not be able to get 'actual' money in exchange for their chips. Ultimately, the chips will be totally useless, and you won't even be able to get that $5 drink with a $5000 chip. In other words, the casino will have a currency collapse - caused by (a) their currency being taken off of the dollar standard; and (b) their indiscrimate inflation - manufacturing more and more chips to distribute.
While this may sound ridiculous to you guys, this is precisely what is happening in the United States today. The United States was on the gold standard until Nixon took the country off of it in 1971. That meant that the paper currency - the dollar - represented exactly an amount of gold that the owner was in possession of. The actual gold was kept in depositories, and the paper currency used for bartering could only represent the amount of gold that was in possession and ownership. As a result, there was absolutely minimal inflation (what little inflation there was was due to the mining of more gold), and the country functioned powerfully from an economic standpoint.
Now when the country was taken off of the gold standard, the government had the ability to arbitrarily print more and more money - and inflation became a problem. However, it did not get out of control until recently. Note that even in our casino example, if the casino took the chips off of the dollar standard, they could still function (albeit in a less stable steady-state) if they ran their establishment responsibly without getting out of hand with the manufacturing of more and more chips.
Since the economic collapse of 2008, the US government has done exactly that. They have irresponsibly printed more and more money in an attempt to ease the pain of the recession. They printed astounding amounts of money to generate the bailout, and now the whole quantitative easing is doing the same thing. Instead of healing a serious infection, they've been trying to put a band-aid on it and move on.
Well folks, it's getting very close to being time to pay the piper. The national debt is close to 15 TRILLION dollars now which is very close the debt ceiling (although that is a somewhat arbitrary number). That means that we are in for something really really bad. In the BEST case scenario, we are going to go through a period of hardship where the quality of life for everyone is going to go down. We won't have the luxuries that we've become accustomed to, and all of the residents of this country are going to deal with a slowly decreasing quality of life.
In worse (but very possible scenarios), the price of food, gas, etc will be such that the middle class will be decimated, and the poorer people will not be able to afford the basics needed for survival. That could in turn lead to a riotous state in which people are mugged, beaten, and murdered for their basic amenities.
Or in order to prevent that, the government may go totally ballistic with raising the taxes on the higher income contingent in order to plug the leak - which will ultimately remove all incentives for the best and brightest people to innovate and produce. Once you do that, there is really little or no hope for the country to persevere.
And in the case of a currency collapse, our dollars will mean nothing. In order to buy food, you will have to barter - either exchanging goods and services directly - or using actual precious metals (which have held their value as a currency primarily because of their rarity) in the form of gold and silver bars and coins.
Fiat currency - or currency that is not backed by anything has ALWAYS failed, and has often resulted in the demise of an empire or country. A few examples:
One of the first examples of the debasement of a currency was the denarius in Rome. At the beginning of the first century A.D., the denarius, Rome's coinage at the time was essentially pure silver. By 54 A.D. Emperor Nero started to devalue the currency in order to pay the bills and increase his own wealth. By around 100 A.D., the denarius' silver content was down to 85%. Emperors that succeeded Nero continued to devalue the currency (i.e. inflation) exactly as the current government has been doing here in the United States. By 218 A.D., the denarius was down to 43% silver. At the time of Rome's collapse, the denarius contained only 0.02% silver and virtually nobody accepted it as a medium of exchange or a store of value.
In the 11th century, a bank in the Szechuan province of China issued paper money in exchange for the iron coins. Initially, this was fine, but inflation started to take hold as the Chinese tried to "fabricate" more money to fund their ongoing war with the Mongols. Gengis Khan and the Mongols won this war, took over the currency, and continued the process of inflation, much as the Romans did with the denarius and as the United States is doing today with the dollar. Ultimately, this empire came crashing down as well. In the words of Marco Polo: "Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both. All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves. The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion."
I could give a few more examples of currency collapses from a long time ago when countries used fiat money. France failed with Livres and Assignats when they lost 99% of their valuations and descended into a riotous state. And Weimar Germany was one of the greatest periods of hyperinflation that ever existed. The Treaty of Versailles was effectively a financial punishment placed on Germany to make reparations for World War I. The sums of money to be paid by Germany were ridiculous, and the only way that it could make repayment was by printing money indiscriminately. (again, EXACTLY as the US is doing now with their huge unpayable debt). Inflation got so bad in this period that German citizens were literally using stacks of marks to heat their furnaces! Or, if you want that expressed mathematically, in April of 1919, the exchange rate for the US dollar was 12 marks. In November of 1921, it was 263 marks. In January of 1923: 17000 marks. August 1923: 4.621 million marks. October of 1923, 25.26 billion marks. December 1923: 4.2 trillion marks.
There are more examples, but this post is getting long enough, and I want to give some examples of more recent currency collapses. Without getting into the amount of detail that I did in the previous paragraphs, I want to point out that fiat money, backed by nothing and eventually irresponsibly inflated crushed the currencies - and ultimately the lives of the denizens. Argentina went from having the eighth largest currency in the world to a cmoplete collapse. In 1992, Finland, Norway, and Italy had catastrophic currency collapses. In 1994, the Mexican peso fell through the floor and economic hardship and a dramatic decrease in quality of life spread through Mexico. The same thing happened to the Thai baht in 1997 and the Russian ruble in 1998 (I actually remember seeing pictures of Russians taking wheelbarrows full of money to the grocery store just to buy a quart of milk). At the present time, Zimbabwe, which once had the strongest currency in Africa and was the wealthiest country on the continent, has totally fallen apart. Mugabe's attempts at disrupting the free market (sound familiar?) and hyperinflation have created a nation that cannot even supply bread and clean water.
Guys, this problem is real and it is here NOW. The United States currency was at least tied into oil whereby anyone buying oil in the Middle East had to purchase it in US dollars. But now that oil is decoupling from the dollar, we are very dangerously close to having a purely fiat currency. And with the goverment trying to find quick fixes to every problem merely by inflating the currency - and ultimately reaching totally unpayable levels of debt, it is inevitable that we are going to enter a period of serious economic hardship. Let me say that again: it is inevitable that we are going to enter a period of serious economic hardship. It may be just a slow disintegration of our quality of life. It may be an absurd tax on the rich, ultimately causing the best and brightest producers to leave and/or stop producing. It may be a riotous state, where it is dangerous to be out on the street. Fiat currency has ALWAYS failed - and its failure has always been expedited when the respective governments have accelerated the printing of more money. Please do not underestimate the problem.
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