Paper money today is fiat money. Since 1971, real assets have not backed the dollars that Americans spend. Paper dollars have value by government fiat – the government has declared that these printed dollars are legal money.
Because of America’s strong economic history, the dollar continues to have perceived value in America and across the globe. Yet that strong history is becoming more distant both in time an in reality. For many reasons, fiat dollars become worth less and less and, by the time people realize this, it may be too late to do anything about it.
A Brief History of Fiat Money
The official money in ancient Rome was the denarius. In 50 AD the denarius was a pure silver coin, the emperors gradually reduced the silver content until the denarius contained less than 0.05% silver. When Rome collapsed, the denarius was unacceptable in exchange for goods and services. China used worthless paper as currency around the 11th century AD.
The currency held value while China expanded its empire, population, and trade surplus. When these slowed, the currency supply continued to increase, which quickly destroyed the economy and the peace.
In France, one attempt at issuing coin-backed paper ended after excessive increases to the money supply and the people could not exchange their now worthless paper notes for coins. In a more recent attempt, the inflated paper franc lost 99% of its value in 12 years. The post WWI Weimar Germany Republic was burdened with severe reparations from its part in WWI. It printed increasingly worthless paper money to pay its debt.
Why Fiat Money Always Decreases to Zero Value
No government has ever been able to discipline its monetary policy. History has shown that fiat currency makes it easier for any government to…
- increase the money supply through borrowing
- increase the money supply through simply printing,
- increase spending – the particularly harmful deficit spending,
- attach burdensome regulations to the money it spends, and
- expand its control of society and business.
Some reasons (called emergencies but are really excuses) for these dangerous economic decisions are:
- funding a war,
- facing a natural disaster,
- responding to the scarcity of an energy or food commodity,
- the widespread greed of government officials to gain additional money, power, and influence,
- an economic downturn, even a cyclical recession, and
- an economic crisis, such as in 2008 which threatened the entire monetary system.
Some of the consequences of undisciplined government actions with fiat money have been:
- an increasing national debt with its interest burden,
- difficulty of finding organizations or nations to buy the increasing debt,
- inflation, or even hyperinflation,
- the declining purchasing power of savings,
- declines in consumer confidence,
- a move to exchange fiat currency for assets that have real value, such as gold or property,
- an increasing dependency on government payouts,
- less room for business to profit and grow as government activity expands,
- a decreasing tax base,
- government defaulting on its obligations such as pensions or entitlements,
- civil unrest, and ultimately
- a change of government or the monetary system.
America’s Move to Fiat Money
Until the great depression, America was on the gold standard and dollar notes could be exchanged for gold. In 1933, the dollar was devalued, but was still backed by gold. With this gold backing along and a strong economy, the US dollar was accepted as the world’s reserve currency after WWII.
The economies of most of the countries involved in WWII were in shambles. However, the deficit spending during the Vietnam War caused nations to redeem their weakened dollars. With the increasing depletion of America’s gold supply, President Nixon ended the dollar’s gold support in 1971.
President Nixon’s action turned the US dollar into fiat money that is itself worth nothing and is not backed by assets of real value. At the same time, all of the world currencies that had been pegged to the US dollar since 1945 also became fiat money.
Nevertheless, in 2010, because the US economy had remained relatively strong, the dollar continues to be the world’s main reserve currency. Global commodities such as oil and gold are priced in US dollars. While the euro had been strengthening to become an alternative reserve currency, recent trouble in several European economies caused many to sell euros and buy US dollars along with gold and other real assets. The situation in Europe has stabilized for the moment and the euro is currently rising again.
The Growing Weakness of the US Economy
Yet, the dollar’s key position in the global economy is increasingly called into question. There are good reasons to question the dollar’s value and strength. The US government is guilty of every action that makes fiat money worthless, and the US economy has experienced nearly all the consequences listed above. Current policy is only increasing these effects and putting the US economy at greater risk. Some current and very serious dangers facing the US economy are:
- Continued deficit spending. Since the 2008 economic crisis, US budget deficits have tripled and are expected to remain well over a trillion dollars for many years.
- Increasing money supply. There are more dollars and less buying in a recession; there are too many US dollars and their worth is necessarily plunging. Many of these additional dollars actually belong to countries buying our debt, such as China and Japan. Possibly, other dollars are simply being printed, such an addition to the supply would immediately devalue our money.
- Soaring national debt: Since the 2008 economic crisis, the national debt has by grown over 3 trillion, over 30% in 2 years. Unsustainable, yet no leveling in view.
- Higher interest rates: Since interest rates have been at historic lows, the cost of borrowing so much money has been relatively low. Higher interest rates could make a broken budget unfixable.
- Entitlement and pension commitments. The long-term obligations of the US economy is now well over 100 trillion dollars. It is impossible to find that much extra money with 4 billion dollars of deficit spending each day. This too is unsustainable.
- Inflation. Dollars will not buy as much. Cash-strapped consumers would need to pull back spending even more. And businesses needing customers would face higher costs and need to raise prices while wooing customers who need lower prices. Inflation will weaken both the US dollar and the US economy.
- Flight from the US. More businesses and dollars are leaving an increasingly hostile business and tax environment for friendlier hosts. This further weakens the US economy.
These risks could spiral down together and drastically worsen. In addition, other dangers that may face the US economy are:
- Countries selling dollars. Many countries have kept dollars in reserve and many countries have purchased parts of the 13 trillion dollar debt. How much weakness in the dollar or US economy will trigger massive selling of dollars?
- Serious terrorist attack. God forbid this happens, but such an event will create a fear that could trigger drastic, “emergency” actions such as selling currencies for gold and other assets. This could destroy the fragile US dollar or other fragile currencies and economies.
- Default of another national currency. This would negatively impact credit, trade, and international corporations, again creating fear and putting added strain on the US economy.
Greece nearly defaulted on its obligations, a situation that had all of Europe scrambling. Fears that its default could topple the precarious economies of Portugal, Spain, and Ireland spurred the world to loan Greece money and give it time to correct its problems.
How much time? More debt for Greece is an additional long-term burden. Will it be able to fix its problems in the midst of violent unrest? What about other countries on the brink of disaster? Which may (almost) default next? If theses smaller economies fall, the larger economies of France, England, and Germany will be at grave risk as well.
Global Impact if the Fiat Dollar Becomes Worthless
World economies are connected and many will fall if the US dollar becomes worthless. Countries holding US dollar in reserve will be weakened. Even if some creditor nations with vibrant economies are able to maintain value in their currency, the impact of the dollar’s crash will be severe.
The world needs America to be strong and buy its products. For example, China may be able to withstand the loss of its US dollars and debt, but if America cannot afford to buy its goods, at best a large number of Chinese factories and businesses will close.
Whether the fall of the US dollar precipitates worldwide economic collapse, or the collapse begins elsewhere in the world does not matter. Many national economies are on the verge of default or collapse and could quickly tumble. Yet, in the face of these concerns, governments still seem to be lending and spending, increasing debt and deficits, the very actions that have brought the globe to the edge of the precipice.
Thomas Herold is a successful entrepreneur and the founder of Wealth Building Course [http://www.wealthbuildingcourse.com/]. A powerful financial education training that teaches the basic steps to become financial free and create lasting wealth. Get your free ebook ‘Building Wealth’ now.
Article Source: http://EzineArticles.com/4759520
When you subtract out the sleeping time, commuting time, working time, and time for things you have to do each and every day of your life, almost all people don’t have more than one or two hours each day to do what they like to do. And if they had the time, would they have the money to do it?
We have discovered a way for you to learn how to “Own Your Life” by building a home-based business and we have a system for doing it that is so simple anyone can do it. It doesn’t require selling, and the best part is it won’t take much of your time either. This System will work for any and all companies.
We’ll give you a FREE REPORT that will layout the basics of how to build a profitable home based business without doing any selling.
— Joe Jepsen