When you mention the term ‘Fiat Currency’ many people will adopt a blank stare and pretend to know what you’re talking about. Today, we’re going to explore the inherent dangers in 2022 of a Fiat Currency – based on trust in Government, so what happens when we lose faith in the Administration?
Fiat money is an inherently worthless object or record that is widely used as a means of payment because people accept it without question.
Today, most people believe that paper currencies are backed only by the faith and credit of governments; they are not backed by any tangible assets. In reality, however, a currency’s backing consists of two parts: the government’s promise to pay interest on outstanding debts and the government’s ability to tax citizens to meet those obligations. These promises are what gives a currency value.
The first modern theory of money was developed by Scotus Lawe and he proposed his ideas to King James VI of Scotland. He suggested that “Money must be valued higher than its material content because otherwise there would be no incentive for production”. Therefore, he concluded that all money has intrinsic value.
Bringing home ‘the bacon’
This idea of intrinsic value gained traction during the Renaissance and was further popularized by Sir Francis Bacon who said:
“Money is a tool used by humans to facilitate the exchange of goods and services.”
Thus, it was believed that Money had value due to human creation.
On the other hand, Adam Smith argued that money only has value because people believe it does. He went on to say:
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
He then goes on to describe how they are motivated to give us money in the first place.
Smith’s argument was that money had no intrinsic value, rather it was created out of thin air by governments and banks.
By comparing both arguments, one can see why most economists support fiat currencies over hard currency. However, this doesn’t change the fact that these currencies are still ultimately backed by nothing more than belief in the government’s ability to print money. The moment that people stop believing in the government, everything collapses.
Fiat money may not have any intrinsic value, but people can be made happier when they exchange them for something else. In a paper published in 1990, economists David Laibson and David Yogo examined whether people would spend more if they were given additional money.
They found that people did indeed spend more, though only after spending had already increased. After spending increases, they spent about $20 extra per week.
However, they also found that people who received larger amounts of money spent about $30 more per week after receiving the money, indicating that people can actually become happier when they receive more money.
Fiat money has no intrinsic value. It’s just a medium of exchange used within a community to facilitate trade between people who want different things. At equilibrium, fiat money allows otherwise impossible transactions to take place.
Losing faith in democracy
More and more people in the West are losing faith in democracy. And the younger they are, the worse the trend.
Harvard lecturer Yascha Monks and Roberto Stefan Foa have published a study which examines decades worth of data on people’s opinions on democracy. They found that the number of people who believe democracy can work properly in modern society has fallen dramatically, and those who do believe that democracy works are far outnumbered by those who think it doesn’t work.
Democracy isn’t as popular as it used to be, according to the New Yorker, which reports a systematic decrease in the proportion of citizens that believe that democracy is essential for life in society.
According to the paper, the number of people who say that democracy is important declined between the 1940s and 1970s, then rose again until the 1990s, before dropping sharply during the 2000s. In the US, the numbers fell from 80% to 50%, in France, from 70% to 40%.
In the US, those who were born before 1950 are more likely to vote Democrat. They’re also more likely to say they’ve voted Republican. But only about half of those born after 1990 feel that way. And those born after 1970 are more likely to identify themselves as independents rather than Republicans or Democrats.
Mounk says:
“We show that the current crisis of democratic legitimacy is unprecedented in post-war history. Democracy is under threat across Europe and North America.”
What could cause such a dramatic shift in opinion? Mounk suggests that the rise of populism and the lack of trust in institutions may play a role.
Populism is defined as a political ideology that appeals to the masses and often uses anti-elitism sentiments to gain power. Populists tend to blame elites for all problems society faces. They also tend to support nationalism and isolationism.
Hyperinflation
In 2009, Zimbabwe experienced one of the most severe episodes of hyperinflation in modern history. This event occurred because the national bank printed too much money and devalued the currency. As inflation grew, prices increased dramatically, and people could no longer afford to pay for goods and services.
The situation became so dire that the government had to introduce a 100 trillion-dollar bill, which was equivalent to $100 billion at the time. However, the currency continued to lose value, and eventually it became worthless. By 2016, the exchange rate had fallen to about 3 cents per US dollar.
Hyperinflation is defined as a sustained increase in prices over a short period of time. This usually happens because there are too many dollars chasing too few goods. The United States experienced hyperinflation in the 1920s. The Zimbabwean economy suffered a similar fate in 2008.
The problem starts when a government prints too much money. As inflation rises, people start hoarding cash. When everyone is holding dollars, it becomes harder to buy things. Businesses stop accepting dollars because they don’t want to lose customers. People begin to use different forms of payment such as barter or foreign currencies.
This causes a chain reaction. Because businesses aren’t taking dollars anymore, fewer dollars come into circulation. More people hoard cash, causing even more inflation. The process continues until the entire economy collapses.
Hyperinflation is defined as having inflation rates above 50%. After the collapse of the Soviet Union in 1991, many countries experienced high levels of inflation. Some nations, such as Argentina, had inflation rates over 1000%, while others, like Bulgaria, saw prices rise by around 400%.
Between 1999 and 2008, Zimbabwe suffered from hyperinflation, where prices increased by up to 5 million times within one day. By 2005, the Zimbabwean dollar lost 99.99% of its value. To put it into perspective, $1 USD equaled 2 billion ZWD in 2001. Today, $1 equals 10 trillion ZWD.
All across the World…
In the United States, the number of Americans who say their nation works “for the good of most people,” according to a 2018 survey by the Pew Research Center, dropped from 77 percent in 2001 to just 26 percent today.
The decline is even starker in Lebanon, where the percentage of those saying their government works for the benefit of most people fell from 78 percent in 2002 to just 26 percent today.
A similar pattern holds true across much of the globe.
In the United Kingdom, for example, the proportion of people who believe their government serves the public rose from 64 percent in 2005 to 76 percent in 2013—but since then, it has fallen again to 66 percent, according to the British Social Attitudes Survey.
And in Germany, the percentage of Germans who think their leaders are working for the common good declined from 70 percent in 2006 to 52 percent in 2016.
Meanwhile, governments around the world have been busy undermining their constituents’ faith in the state.
Since 2000, the number of countries with strong democratic institutions has shrunk from 51 to 28.
In many countries around the globe, voters are losing faith in their governments.
The latest Pew Research Center survey finds that majorities in most nations believe their nation’s leaders do too much “to help out ordinary people,” including nearly nine-in-ten in China, India, Indonesia, Mexico, Nigeria, South Africa and Turkey.
A median of just 11% across 29 countries say their leaders work mostly for the good of everyone. By comparison, majorities in 22 of those countries say their leaders work mainly for themselves.
And while there is no single explanation for why public opinion about the performance of national leaders varies widely among countries, the findings suggest that some of the factors contributing to this variation include the strength of democratic institutions and the degree of economic inequality within countries.
The Pew Research Center found that majorities across Western democracies now view their respective governments as having become less effective at addressing problems such as unemployment, inequality, terrorism, and crime. This shift represents a sharp break from the public mood during the early 2000s, when many nations enjoyed robust economic growth and low rates of violent extremism. As recently as 2010, nearly three-quarters of Germans thought their government had been successful in dealing with security threats; today, fewer than half do.
And while some of those changes reflect shifting attitudes toward specific issues — such as immigration and globalization — others stem from broad trends like declining trust in institutions generally. A majority of French voters say their country’s economy is headed in the wrong direction, and more than half of Italians and Spaniards feel their governments are failing to address pressing concerns.
Here in Australia…
Professor Ian McAllister led the latest The Australian National University (ANU) Australian Election Study.
He’s been studying elections for 40 years, and never has he seen such poor returns for public trust in and satisfaction with democratic institutions | Professor Ian McAllister – “Trust in government has reached its lowest level on record, with just one-in-four Australians saying they had confidence in their political leaders and institutions, according to a major study of the 2019 Federal Election.”
The latest Aussie Election Survey, conducted by the University of Melbourne, also found Australians’ dissatisfaction with democracy is at its highest level since the constitutional crisis of 1976.
Just 44% of Australians are satisfied with the way democracy works in Australia, according to an Essential poll released today. A total of 55% said they were dissatisfied – the highest level recorded in the survey’s history.
Backed by Bullion – The Gold standard
Throughout human history, Gold has been used as a currency in one way or another, from gold coins to paper notes back by the gold standard – only recently has money moved into a fiat system where the value of money doesn’t depend on any physical commodity.
From gold coins to paper notes backing by the gold standard, the value of money has shifted from a commodity to a fiat system.
Since then, inflation and a falling Dollar mean rising gold prices.
By buying gold, people can protect themselves against times of economic uncertainty.
Gold levels may also influence national economies engaged in global trade and international finance.
As far back as the Byzantine Empire, money has been used to support national currencies — that is, those considered legal currency in their country of origin. Money was also used as a global reserve currency up through most the twentieth century; the United States had the U.S. dollar on the gold standard until 1971, when President Richard Nixon ended it.
When the gold standard was abandoned in 1971, it wasn’t because people lost faith in gold, but rather because they needed a new currency system that would allow them to continue to spend money without having to worry about whether or not they could pay back their debts.
In order to ensure that no one can create ever-increasing amounts of debt, governments must limit the amount of currency that exists within the country. However, this measure also limits how much money citizens can earn, so inflation becomes a problem.
A great example of this is Japan, where annualized rates of inflation reached nearly 10% in 2008 and 2009. By imposing strict limitations on both the supply of money and the amount of goods and services produced, economies are able to avoid hyperinflation.
Many people mistakenly use the price of gold as a definitive proxy measure of the value of a country’s currency. While there is certainly a relationship between the two, it is not necessarily one of inverse proportionality.
For example, if the demand for gold increases, then the market price of gold rises because investors seek out alternative investment options. However, if the supply of gold decreases, then the market price may fall because fewer individuals wish to invest in gold due to lower interest rates.
For example, if a country experiences inflation, then it means that people are spending money faster than they earn it. In order to combat inflation, the government might raise interest rates so that people would save instead of spend. However, this could also affect the economy negatively because those who do not own the debt would stop saving and start spending again. Thus, an increase in the cost of borrowing money could lead to deflation (falling prices) rather than inflation.
Investment & Storage
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Peter Hobson
My background involves the ownership of many businesses including owning and running multiple Chiropractic offices but mainly focused in Nerang on the Gold Coast for 30 Years.
I have a passion for accumulating and holding Bullion and have done so for many years. My extensive Business skills and Bullion knowledge makes it easy to assist others buying, selling and storing their Bullion.
Peter and Cassie work together to assist anyone from the experienced Bullion Investors to the complete novice. They are here to answer any questions to help you.
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