Daily Archives: June 30, 2015

Fiat money and its house of cards

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Popular ignorance can be harmful for all of society. Lack of knowledge in economic theories and affairs is very common right now and hurts the financial system, at least for middle and lower classes. It begins to be a political matter when you study the actual foundation and characteristics of fiat money. Millions of people ignore it but it must be an obligation to spread the word about this particular issue.

Global fiat currency began when Nixon declared the Gold Standard as an ineffective and discontinued financial means of determining true value of the US Dollar. That’s when the fiat money scam began. Now the value would be determined by the trust of the consumer on the currency and not by a physical hard asset as backup, money just represents paper with numbers on it. A few years later the prices of precious metals and oil multiply several times. The prices of the sugar went up forty times. The consumers were petrified by fear. The trend of hoarding primary goods began with these odd events. Speculation took hold in every area of economy.

By that time, the Government invented another good term for controlling the financial expectations of the people. “Inflation Targeting” was presented as a useful tool that the Federal Reserve and political leaders had for getting “realistic and practical information” about the national indicators of economy. In that way, the concept of Central Banks acquired supreme powers over the economic health of countries. Now they could make some choices when it comes to price increases.

If you see the events in an objective way, you can understand the great abuse of power that exists in having a Central Bank who can choose inflation rates at will. Added to that, the fiat money clearly represents a modifiable instrument for political purposes. There is unrealistic facts about a currency that doesn’t have a physical asset supporting it. It is like a house of cards. A fragile structure with no foundations or securities about its strength.

The financial authorities adopted a god-like status between all those privileges that fiat money allowed to and things went even worst. Many important journalists in the financial world supported all these dangerous politics in the currency matter. The levels of complacency were insane. In 2007, The London Times published a festive article called “The Great Moderation” which began with: “History will marvel at the stability of our era”. All those unhealthy measures were well accepted and speculation in every aspect continued.

The Federal Reserve (functioning as the central bank of the United States) and its chairman, Mr. Ben Bernanke didn’t expect any financial disaster or anything like that. They were blinded by pride and arrogance, belonging to the achievements of another era. The virtual success created by they was expected to be everlasting. The several manipulations of a fragile system and a currency backed by smoke were lethal for the already injured markets.

Even one of the most supportive journalist in this matter, Mr. Martin Wolf, said “If fiat money is not made to work better than it has, who knows what our children might decide to do in desperation. They might decide to bring back and embrace gold”. This was declared after publishing a lot of articles supporting the irresponsible measures. Also, in the quoted article, Wolf still declares an aversion to the Gold Standard.

Now, the real question is: this disaster was the product of the ignorance or corruption, or both? Because the manipulation of inflation rates and fiat money can’t be done without ignorance on the subject. The bubble would explode at any time. They had to know that and more. Were economic and financial principles ignored for pursuing a greater and private goal? We can always distrust on the Government actions and purposes and it is clear that they use in their favor the unstable fiat money, but they cause this disaster by design?

Some considers that the Gold Standard is a fundamental element of the freedom, because offers security, and better than that, offers the capacity of saving and creation of wealth being independent of Government actions, politics, measures and intentions. The State must be guarantor of security and justice, not of choosing without foundations the value of the national currency or the prices increases. This is what happens when Government and banks team up and decide to oppress the people in a way that they don’t even realize.

When a country hoards millions of tons in gold and reflects the value inside their vaults into their currency, making every bill a representation of that wealth, you get financial safety and the Government gains trust. When your bank account shows numbers that are only that, numbers, no one can have safety. They are living day after day in a house of cards, built by speculators. The consequences of these financial politics are alive to this day. The Gold Standard works hand by hand with democracy and with all the freedom principles proposed in the Constitution.