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What Comes After Paper Money, Part 1: Fiat’s Obvious Failure

Business Insider just posted a Deutsche Bank chart that illustrates the difference between life under the Classical Gold Standard and today’s “modern” forms of money. It’s for the UK only but is a pretty good representation of the world in general:

UK inflation 1500 to 2010

For the first four hundred years depicted here, money was gold and silver — the quantity of which rose at roughly the same rate as the human population. Prices during that time fluctuated, but only modestly by today’s standards, and they always returned to more-or-less the same level. In other words, money held its value for not just years but centuries. It was a fixed aspect of the financial environment and was therefore not a tool of economic policy. Governments and individuals had to adapt to unchanging money rather than forcing money to adapt to political circumstances.

A phase change occurs in the 20th century when the US created the Federal Reserve and World Wars I and II placed survival above monetary stability for most of Europe and Asia. Violent swings in the value of money became the norm, and with the subsequent worldwide adoption of fiat currencies — which governments can create at will — volatility has soared.

Clearly, something bad has happened — and just as clearly something really bad is coming. The question is what. Inflation and deflation both have their articulate proponents, many of whom (adding yet another layer of complexity) expect both but disagree on the order in which they’ll occur. See here, here, here, and here. This is a fascinating debate, with huge implications for personal financial planning. We all have to choose a side with our investments, and the risks and potential rewards have never been higher.

The follow-on question is also fascinating: What do we use for money once fiat currencies inevitably fail? Will central banks adopt some version of Milton Friedman’s computer that increases the supply of base money by a pre-set amount each year, removing the temptation to inflate? Will cyber-currencies like bitcoin turn out to be secure enough to gain worldwide acceptance, eliminating the need for underlying physical reserves? Is a high-tech gold standard possible, in which physical bullion backs an electronic currency that circulates in place of unbacked fiat currencies? Again, this is interesting in its own right but crucially important for everyone with money to invest. Stay tuned.

18 thoughts on "What Comes After Paper Money, Part 1: Fiat’s Obvious Failure"

  1. If we mention genesis here, we shoult also mention revelation, because that is what is to be expected in the future. In the book of revelation we can read that a world currency will be installed and people will have to carry a sign on their hand in order to be able to buy or sell anything. That sign will be the 666. Those who don’t carry the sign wont be able to buy or sell. So it seems that after the epic meltdown we will have a totalitarian world governement and a one world electronic currency. That all points into the direction of what the IMF would like to install. The aim of the whole thing is to extinguish cristians and cristianity. The use of Gold and Silver for trade would be a showstopper for their plans, as it is free and anonym money. Once humanity has arrrived at this point, the world is going to be a horrible place to be. A world without god is a dark world full of hate and crime. We see that today already but that will worsen in the time to come.

    Really not a nice outlook but that is what the Bible tell us.

  2. We are dancing around the issues here with micro answers.The big picture,away from the charts & graphs,show some different answers.I believe there will be a breakdown of the political & social order.The financial establishment can never pay the huge leveraged debt it has run up,but it tries! The method used to do this is “Financial Repression” & the victims of this repression are the working middle class,in Europe they call it “Austerity”.It can’t work because the middle classes are the prime drivers of our consumer based economy.If you impoverish the middle class (the consumers) you destroy consumerism & the business’s that deal with the consumers.To me this means contraction which is another name for deflation

    The big corporations can’t sell their products to a clientele that is broke & has no credit!

    Another reason for deflation is price discovery.Most of the business’s out there have distorted models developed in the age of easy money & can’t survive in competitive markets,their overhead is way too high!
    That’s why internet sales are killing retailers.
    The middle classes,in America & Europe,are being stretched like a rubber band & soon that rubber band will snap.When this happens the mobs will hit the streets!

  3. Since there are so many vested interests in the status quo I wouldn’t be surprised if things keep muddling along and getting crazier and crazier for several more years. As far as, inflation v. deflation, I would say deflation comes first because QE causes it.

  4. When we had gold in play it didn’t stop countries from cheating so it’s not the answer. I think Freedman’s solution will have to be the answer but getting all to play by the rules will be difficult as politics will get in the way when people are unhappy about not having jobs and are stuck in poverty. Equality is the issue now, not gold or how currency is manipulated.

      1. I think you have the EMPHAsis on the wrong syllABLE. Fiat or anything else acting as money relies totally on confidence that you can take it down to the grocers and exchange it for groceries. If you don’t have confidence you will demand to be paid in groceries.

  5. Collapsing oil prices are the precursor to the DERIVATIVE DEFLATIONARY meltdown ahead which IMO will be followed by big price inflations of goods/services to fiat everywhere. This year, 2015, the IMF is positioning itself to take advantage of the coming derivative induced bank system breakdown. Look for the IMF to swoop in posing as the world’s “saviors” with their “solutions” in the coming crisis. The crisis will be so dramatic that it will be hard for the world not to acquiesce to a new global supranational central banking system (note that the BIS will most likely be pulling the strings from behind the curtain).

    Unserviceable sovereign debts and bad derivative betting banks will also likely be used as an excuse to further consolidate and extract even more wealth from the world (devaluating fiat against real things like bullion). Team Russia & Team China are in on the game too. Both countries will get a larger role in the next monetary system as the USA loses its sole reserve currency status. Look for each country to still be using its regional fiats of today tied to a much higher gold bullion price tomorrow (although these paper/digital currencies of today will be worse much less then). A bit more on the Keynesian wet dream that is the IMF – http://youtu.be/qoDQ6xtoXsA

      1. There is a perceived threat of WWIII but China & Russia are playing their roles in the coming global monetary system. They have a better chance of success via intelligent diplomacy and stratagem, not thermo nuclear warfare where no one wins.

  6. God has determined what is money.

    Genesis 13:1-2 “And Abram went up out of Egypt, he and his wife, and all that he had, and Lot with him, into the south. And he was very rich in possession of gold and silver.”

    Precious Metals must be used – also because they embody personal freedom.

    God bless all!

    1. It would stop the criminal bankers from destroying countries by financially hijacking them. Bankers can’t print gold or create it out of thin air. It would also make waging war very hard, we need a trillion dollars to go to war, well better get mining.

      Now I think we may need a hybrid system, maybe PM’s and some sort of digital currency for labor and or commodity backed currency.

      My thinking is to try and prevent bankers from robbing the country again. I would shut down all the banks and go more to a credit union system. Put the control of money back on CONgress.

      1. Exactly! You both are correct. Which is exactly why it will not happen. Bankers are ruling the world. It will be what they want and decide. Some electronic fiat currency that they can ‘print’ as much as they want. We are going to be forced to accept it as we now accept fiat currency. Which mean we are going to work for nothing. Slaves…

      2. Put control back on CONgress? Why? It’s not our Congress any longer. Someone else has purchased it and now owns it.

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