Fiat Currency: A Potentially Fatal Flaw?

August 16th, 2007

No economic or currency system is flawless. There is a reason we use a fiat system, as we ran into problems in the past with other currency systems. However, I think it’s now coming to the point where we can see fiat currency isn’t all its cracked up to be. It all stems from the fact that the currency systems of the world aren’t real. What I mean by that is currency has become ‘just a number’ that we place a value on. Currency isn’t backed by gold, silver or anything real. In fact, it’s just a piece of paper (well it isn’t paper, but close enough) and often times it isn’t even printed but lives in bank accounts and within the economic system digitally.

“Sir, we just ran out of money!”

“Then print some more!”

The problem is that is has become too easy to print more money. Normally supply and demand would cause a currency to fall fast if too much money has been printed. This isn’t happening because the US stopped printing the M3 (an economic indicator) that allows the world to see how much money is floating around in circulation. Also, with the case of the US dollar, it’s a world wide currency and used for oil trading, so it hasn’t acted like a normal currency might have when supply increases dramatically.

China has been responsible for buying up much of the debt the US has been issuing to the point where its reserves of USD are swelling at an alarming rate. Now the Chinese may stop purchasing so many USD (decreasing demand) because even they are worried about a falling dollar and they don’t want to lose money either. It’s interesting to note that they are also now in a very strong position at any economic bargaining table. You will notice not much gets done on the intellectual property rights and how China blatantly refuses to protect patents. China now has the power to cause a collapse in the USD if the two countries were to ever decide on a show down, whether it be economically, politically or war… I say this not out of fear, but because I’ve studied history and I came to the conclusion that two super powers often don’t get along too well after a while when resources are finite.

I’ve alluded to the currency situation in the past as possibly the worst the world has ever seen for fiat currency. I still believe a collapse could happen though the when and where, I have no clue. I’m not saying it will happen, but it could eventually occur. If the US dollar were to ever collapse I think a new currency, the Amero (or similar name) would surface very quickly and it would be backed by gold and/or silver and would mark the end of fiat currency. Things would be turbulent and there might be a few years where the economy won’t do so well, but we’ll eventually recover. In fact, something like this may need to occur… it may even be a foregone conclusion that it will eventually occur. I’m not entirely sure.

Fiat Currency: A Potentially Fatal Flaw?

Fiat currency has one big flaw. This world has a finite amount of resources but an infinite number of dollars can be printed to try and fulfill an infinite number of human desires. Anytime you try and buy a finite good with a seemingly infinite one, things don’t always work out well.

Entry Filed under: Articles