The Failure Of Fiat Currencies

Authored by Tom Lewis via GoldTelegraph.com,

We work hard for our money, as we think it has long-lasting value. That value can buy us other things that we want. It seems like a good exchange. However, few of us consider how extrinsic the value of money really is. In reality, we are dealing in valueless fiat currencies. 

At one time, our money was backed by the tangible value of gold or other precious metals, legal tender for anything of equal value.

That is not the case any longer. The value of a dollar bill these days is what the government says it is. This arbitrary value is dependent on the whim of the government. And the government can print money like a copy machine run amok. There are no limits to how much money can be put into circulation. That is because this money isn’t backed by any real value, it’s called fiat currency.

The US dollar became fiat currency when it stopped being backed by gold over 46 years ago and it has lost 97 percent of its value since the establishment of the Federal Reserve in 1913.

Apart from cryptocurrencies, all the world’s major countries are using fiat currency.

Since Roman times, fiat money has failed spectacularly throughout history due to the same pattern of rapid devaluation and then total collapse. The Romans used a 100 percent pure silver coin called the denarius at the start of the first century. By mid-century, during Nero’s rule, the denarius only contained 94% silver. By 100 A.D., the silver content had been reduced to 85%. The value of the coin was decreasing steadily. This worked well for Nero and his followers, who no longer had to pay their debt at the full, actual value while additionally increasing their own wealth. During the next century, the coin was made of less than 50% silver. By 244, Emperor Philip the Arab had reduced the amount of silver in the denarius to 0.05%. When the Roman Empire finally fell, the denarius contained only 0.02% of silver.

The devaluation of currency invariably is the precursor to economic ruin.

China was the first country to use paper money in the 7th century. Until that time, they used copper coins but switched to iron due to a copper shortage. The easy availability of iron caused it to be overissued, until it too, collapsed. During the 11th century, a Szechuan bank began to issue paper currency in exchange for the iron currency. This worked briefly since the paper could be traded for rare, valuable metals, such as gold and silver, or for valuable silk. Then, China entered into a costly war with Mongolia and was eventually defeated by the Mongol leader, Genghis Khan. In an effort at expansion, Genghis’s grandson, Kublai Khan, started to flood paper money throughout the empire. As China’s trade increased, the influx of fiat paper – currency backed by no value – caused even the wealthiest of families to be ruined.

France may be the only country that has been defeated by fiat money three times. The Sun King, Louis XIV, left his successor heavily in debt. Poor Louis XV took the advice of the Scottish economist John Law and simply flooded the country with paper currency instead of the previously acceptable coins. The paper money devalued the actually valuable coins, causing the heir to the Sun King to bankrupt his own country. Yet France didn’t learn its lesson well the first time. More than 100 years later, France gave paper money another try, creating an inflationary spiral of 13,000 percent. Napoleon, and the introduction of a gold-backed Franc came to the rescue. Was France now convinced of the negative effects of fiat currency? Not quite. In the 1930’s, paper currency was again issued, causing inflation to devalue the paper Franc by 99% in 12 years.

Another country faced with huge, unmanageable, and unpayable debt was post-WWI Germany. Germany did not learn from history. Instead, it created a state of unheard of hyperinflation. One hundred and thirty printing companies churned out paper money as fast as they could, devaluing the German Mark so much that its only real value was to be used as kindling.

America has a long history with fiat currency, starting with the Massachusetts Colonial notes of the 1600s. Other colonies quickly followed suit. The notes were to be redeemable for tangible goods, but they weren’t backed by any tangible commodity. Repeating a long, historical sequence of events, too many printed notes soon made the currency worthless. America’s next venture into unbacked paper currency was to finance the Revolutionary War. It, too, crashed.

It seemed American might finally have learned a lesson. Up until 1913, American currency was rigorously backed with actual gold. The establishment of the Federal Reserve Bank that year reduced the amount of gold officially backing the dollar. Owning gold became illegal. In 1971, any gold standard was eliminated as the US dollar officially became another piece of paper. Its value has decreased by 92% since 1913.

With history being the best indicator of the future, America is primed for another currency collapse.

We are facing a debt as out-of-control as Weimar Germany while the government keeps the printing presses busy. At this time, China and Russia are supporting their respective currencies with gold. In addition, both countries are using a new money transfer system, CIPS (China International Payment System), to replace the western SWIFT (Society for Worldwide Interbank Financial Telecommunication) system.

Western countries, all of whom use SWIFT for money transfers, have had a monopoly on the manipulation of international money transfers. With Washington and SWIFT’s help, hedge fund billionaire Paul Singer was able force a debt-ridden Argentina to pay 20 cents on the dollar for his bonds, valued at $3 billion, making it virtually impossible for Argentina to pay its other debtors.

The current Argentine President Macri reopened negotiations for the long-time debts, settling at 30 cents on the dollar. The manipulation of fiat money can quickly result in the manipulation of fiat debt, benefitting a select few and ruining the rest.

In the meantime, China and Russia’s use of gold-backed currency and the use of their own money-transfer system have improved both economies. The possibility of CIPS being used worldwide and serving as an alternate monetary transfer method offers hope that the Western fiat money scheme may soon be halted. Western fiat money manipulation has turned into an unsustainable Ponzi scheme that is holding on by a thread. Approximately 97% of the Western money is printed randomly as needed, in effect creating play money.

If the system falls, it will be the fall of a monster. When banks try to call in their huge fiat debts, it could cause an avalanche of repercussions. The elite will be safe, but the vast majority will be left in dire straits.

Perhaps digital payments will take the place of paper currency. The global monetary future is still developing, but drastic changes are inevitable. 

Comments

Sonny Brakes Slippery Slope Wed, 02/28/2018 - 21:02 Permalink

Does that include the gold that's currently being stored as ore in the ground that hasn't yet been mined? At the moment fiat currency is successfully being used to enslave miners and, being the good sports that they are, they keep showing up for work. When fiat fails how valuable will the gold in the ground be if you've got to start paying miners in actual gold.

In reply to by Slippery Slope

MozartIII J S Bach Wed, 02/28/2018 - 21:29 Permalink

In no Country with a major economy do we have a failure in Fiat currencies. It is all about trust. Not Gold. Simon Black writes his doom porn all the time, with others to get subscribers. One hell of a subscription price. There are countries that are stacking. However this will not effect the dollar for a long time. Find very old posts for details..... Oh wait, its zero hedge and you can't do that.

In reply to by J S Bach

Unknown User skbull44 Thu, 03/01/2018 - 00:04 Permalink

Hard to read gold bug's nonsense about how gold bricks have value while full faith and credit of borrowers doesn't. It takes work to find and refine gold just like paying off a loan. Except one scales with demand and the other doesn't, causing volatility spikes.

How about taking minimal effort in learning what you write about.

In reply to by skbull44

brianshell Unknown User Thu, 03/01/2018 - 03:36 Permalink

The federal reserve and all other "central" banks are empty shells. Without the sovereigns on which they depend, they would  fail. The same goes for cryptocurrencies.

Having a million bitcoin is fine until you have to face the legal breadth of a sovereign to realize material assets.

I suppose cryptocurrency might work but only when endorsed and regulated by a sovereign.

Perhaps a global cryptocurrency might be endorsed by the International BAR Association. After all, lawyers always have the last say.

In reply to by Unknown User

JIMSJOE2 MozartIII Thu, 03/01/2018 - 06:45 Permalink

What total nonsense. Your typical metals promoter and none of what he says is based on any reality. Take Russia and China backing their currencies with gold. They are not and will never. First of all this would strengthen the currencies and collapse China's exports and Russia's oil and gas exports allowing US firms to then compete in Europe. Folks this is ECON 101 which this guy evidently didn't take. Another problem is that China alone has over $20 trillion in liquidity. The total amount of gold mined at today's prices is on $7 trillion and most of this is simply unavailable so where are they going to get the gold? In addition this requires a country to have a gold window and to constantly buy gold to back the new liquidity needed for an economy to grow and restock the gold window. There is simply no major country that can afford this today with prices where they are. No new liquidity-no new growth.

      What the guy fails to mention is that the PBOC has not bought any gold for over a year and since early 2017 has been buying billions a month in treasuries with well over $1.2 trillion. Russia has also been buying and has over $105 billion of these. One of the reasons Russia buys gold is one tradition and two they have a direct supply from their own mines allowing them a lower prices than in London. Sill another factor is that gold demand is down worldwide just look at Barricks latest Q4 filings. Their Q2 and 3 filings shows demand weakness and even though they beat estimates in Q4 it came with a warning. If demand did not increase they will be forced to cut back on production in the next 4 years. Gold is not even a store of value today. Everybody who bought gold at over $1400 to $2000 and silver at over $23 going to $50 is still underwater and will continue to be. The gold promoters live in the past and are hoping for a return of the "good of days" and this will happen. The world's economy has by-passed gold and is no longer relevant. It's like Henry Ford was once asked what would people ask for before the auto and his reply, "Faster horses".

    Back to China. In an interview of the head of the PBOC in the South China Morning Post he was asked why they set up so many currency swaps. His reply was it has nothing to do with us losing confidence in dollars or treasuries but the fact that the dollar has been too strong increasing trade settlement cos and hurting exports. We were forced to. He went on to say you don't buy another country's debt if you have no confidence in its future. The last thing both China and Russia want is to have these assets tank. Everything you read in the alt media is simply false and is all part of a narrative just like the MSM is.

    Countries do not like to hold large amounts of foreign currencies as they pay no interest and are forced to buy treasuries as this is the second most liquid market on the planet behind currencies and are always in great demand. China is at least 10 years away from having a large and liquid enough bond market to compete. Europe has no federalized bond market backed by all countries so that leaves treasuries as the only game in town.

    By the way it is not central banks who create liquidity but commercial banks by loans. The Swiss central bank held a press conference in prime time last night stating that government authorities have lost control of the money supply and this was because of commercial banks. This was not a problem but now is as liquidity as grown Now if the velocity of money increases this will cause increased inflation and lower living standards eventually hurting the real economy. The only tool central banks have is interest rates. It is not how much liquidity that is in economy but the velocity of money. You can have an economy flooded by liquidity but if people and businesses have no confidence in their future, they save more and spend less with the reverse also true.

    Now crude. The US has just passed the Saudis in crude exports and now is a major oil producing country. This is why Congress threw the Saudis under the bus and has made the petrodollar meaningless in the Middles East. Since the US trade deficit is partly made up of crude imports, as the import contracts gradually expire you will see the deficit start to fall. Forget about the nonsense promoted by others including SSROCCO that the oil business in the US is dying along with shale. These people were all ranting when prices were falling that at $60 to $70 crude would close all shale down. It didn't. Their costs are much lower than stated on the net. As these firms need working capital for day to day operations from banks and investors and no one is going to lend if costs are even remotely close to current prices.

   There is so much bullshit now on the alt media with most losing its credibility and a news or market source.

In reply to by MozartIII

anarchitect JIMSJOE2 Thu, 03/01/2018 - 07:23 Permalink

You are a fool.  A strong currency is no detriment to economic success.  The deutsche mark, the Swiss franc, even the dollar in its day...I could go on.  You parrot received economic wisdom the way people parrot from holy books.  How much gold the PBOC holds is unknown.  You are a fool (excuse me for repeating myself) if you think their official numbers are anywhere near accurate.  I agree with you, however, that Russia and China are unlikely to back their currencies with gold.  The reason is that their politicians are no different than others, and want the privilege of conjuring "wealth" out of nothing, distributing it to sycophants and other symbiotic parasites.

In reply to by JIMSJOE2

JIMSJOE2 DaiRR Thu, 03/01/2018 - 07:40 Permalink

The ratio is meaningless and was set in 1792. When metals went from fixed to floating prices this made the ratio worthless today. As silver has moved from a monetary based metal to an industrial based commodity this also makes the ratio worthless. Those that pump and dump promote the bullshit to get you to buy. They have been consistently wrong as they are like used car salesmen who have no trading experience in financial markets. Their targets are also people with no or little trading experience as people with experience see thru the bullshit! 

    Gold is currently right above the 1300 resistance level and way under the 1362 reversal level. As we move into the middle of 2018 to 2021 as Europe collapses capital will then again flow into dollars from there causing massive dollar strength and crush both gold and silver as in 2016. Best trading advice ever, "Follow the money"!

In reply to by DaiRR

striped-pad runswithscissors Thu, 03/01/2018 - 03:36 Permalink

National currency is a debt from the central bank to the current holder. Its value depends on the central bank's willingness and ability to honour that debt, which generally happens indirectly when a creditor of the bank and a debtor of the bank exchange currency for something else. (Usually the debtor is the government, and it takes currency from a bank creditor in exchange for writing off a tax debt).

I can't see how central banks will avoid defaulting on at least some of that debt, because they have overpaid for government debt and other assets, which I believe has made them insolvent, but I still value their currency slightly higher than crypto, where there is no even theoretical obligation on anyone to provide anything in exchange for it.

{Cue bitcoin enthusiasts...}

In reply to by runswithscissors

Silver Savior Wed, 02/28/2018 - 20:37 Permalink

The chart on the top of the page says everything. You either believe in the chart or you have nominal confusion. Take your pick. 

Bitcoin is well......Bitcoin. use the profits to buy metals. Man I am kicking myself for not buying Digixdao. It will probably fall to nothing for no reason like the rest of them do then I will buy in.

Silver Savior Wed, 02/28/2018 - 20:45 Permalink

My family thinks I am nuts for buying crypto. They hurt my feelings because they say it's not real. lol. Of course I don't talk about it much. Don't discuss my profits either ;)

TheEndIsNear Wed, 02/28/2018 - 20:48 Permalink

Our funny money has been losing value slowly since 1913. When does the "suddenly" part happen is the question.  (ie, From a character in one of Hemingway's novel's about losing his fortune "Slowly, then suddenly".)

 

Tom Green Swedish Wed, 02/28/2018 - 21:09 Permalink

Yes we know. Money is a creation to create debt serfs. Crytpo currency was created by a genius to transfer money not to be money. Read the fucking white paper. Nowhere does it mention it is a replacement for fiat currency, its just an alternative and less expensive way to transfer it. Sadly this is not the realization. People abused it. It wastes more electricity and the transfer fees are way higher than the current system. Sadly it wasnt thought out entirely by anyone besides ripple I assume. Certain other applications can be created but the encryption is ridicuiously too compex for the purpose it serves. Also a cap on it is not well thought out. The white paper perhaps is misleading or a serious error which got out of control. I believe someone will have a solution for this technology but honestly it feels like the early internet yet. That being the case its like saying a littany of unsucessful past gimmicks would take over the earth. Obviously more failures occured than successes. I imagine blockchain tech will one day be useful but i highly doubt any current offerings have that potential. Decentralization is costly and people will need major incentives to support it. Right now the only incentive is to trade it like forex. Not exactly what the creator had in mind? Serioulsy swapping one crytpo for another? Or cash for crytpo to create gains. Not even close.

Trogdor Wed, 02/28/2018 - 22:00 Permalink

I wish that whenever someone says they're "Printing money out of thin air" - they would add that they are also creating debt out of thin air - debt the American people are on the hook for - and yet because they never print the money to pay off the interest on this "debt out of thin air" - it can never be paid off.  If every dollar in the economy was magically returned to the filth who own the Fed, the debt would still exist ....

.... and the bankers think it's "terrible" that (aware) people think they're cancerous parasites ....

earleflorida Wed, 02/28/2018 - 23:00 Permalink

as long as the usa dollar is backed by the full faith of the usa military gun boat policy it will remain unchallenged

but the sad reality is that a in a mad, mad, truly 'MAD' world we live in today, the very fiat paper we prostrate too, could ignite our very doom,

 where gold will be all that glitters upon our insufferable corpse

 

'sometime progress needs a darwinian reset of backwardation to survive?'

Let it Go Wed, 02/28/2018 - 23:16 Permalink

The myth promoted by the central banks that a major currency cannot fail is accepted as fact by many people however, the rapid demise of either the yen or the euro is all that will be needed to reveal the truth. When a major currency fails it will remind people everywhere that our system of fiat money is held together only by faith in the system and a prayer.

Japan's public debt, which stands at around 250% of its GDP is the highest in the industrialized world. In the future, Japan's debt can only be addressed by printing more money and debasing the yen. The article below explores how when Japan crumbles it will be felt across the world.

  http://The Yen And Its Failure To Fail.html

Silver Savior Wed, 02/28/2018 - 23:44 Permalink

You guys can fart around with the Monopoly money all you want I am done with it. Make more of it at the same time it loses purchasing power. You will not even be above water. 

The money of Kings is what l am interested in.