Death By Fiat Currency And How To Save Yourself
May 1st, 2020 | JH
“Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both… All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves…The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.” - Marco Polo on China
Governments around the world are playing with fire. The massive deficits and liquidity being tossed around in the system in an attempt to stop the Coronavirus or Covid-19 or “Chinese virus” as Donald Trump calls it, or “CCP virus” as some anti-communist conservatives are trying hard to call it, is going to create a big inflationary bubble.
Last time this was tried it was 2008/09 and the financial crisis was met with massive deficits and liquidity being tossed around in the system. The time before that was post-September 11, 2001. The time before that was Spring of 2000 when the tech bubble burst.
Each time, the stimulus by government grows bigger.
Because each economic recovery is infused with inflationary policies that are financed with unlimited fiat currency.
Fiat currency is money that isn’t backed by the value of anything tangible. Throughout most of human history, this value was precious metal. A gold-backed currency gave the currency its value and provided a hard asset to create trade against. Cash money was nothing more than a paper promise that the paper could be redeemed for gold.
Fiat currency is currency backed by nothing but the promise that the worth of the paper will be respected by its face value because it is a product of officialdom in the form of government authority. A government can print as much of it as a government desires and people will use it and respect it so long as that government tells them to.
At various times throughout history, governments have switched from hard (gold backed) currency, to fiat currency. This always ends in decline and collapse. Sometimes the decline and collapse is slow, such as the Roman Empire slowly devaluing their coins by using less and less gold and more and more alternative cheap metal. Other times the decline is fast, such as 1920’s Weimar Germany, when in a matter of months people needed a wheelbarrow full of cash in order to buy a loaf of bread.
Example after example throughout history shows that fiat currency always ends the same way. Decline and collapse is inevitable.
The US dollar arguably became somewhat fiat back in 1933 when FDR and his new deal policies tried to solve the Great Depression. The real unarguable turning point occurred under Richard Nixon in 1971. This was when the US dollar officially separated from any gold backed attachment. Almost immediately inflation took off. Reagan exploded the federal deficit and the fiat fuelled boom/bust cycle of the world’s economy began in earnest.
Fiat currency always starts off okay, but human nature being what it is, always pushes the envelope of acceptability. Temptation to run deficits and create more money inevitably arrives. Inflationary measures create an overextension of the economy and eventually a corrective measure in the form of a recession arrives. In order to mitigate the pain of a recession, governments started using fiat currency to overcome downturns faster and easier than before. This leads to another, larger inflation and then the cycle repeats itself.
We are now at the point where the inflationary attempts are catastrophically huge. Deficits are inconceivably large and total debt is a massive juggernaut of doom. The appetite of the public for even more money printing and deficits has grown with experience. Fiscal conservatism is now completely dead, and everyone is talking seriously about a Universal Basic Income, created by the government with money out of thin air.
What this is, is a glimpse at fiat currency’s end game. We are almost 50 years into an international system of fiat currency based on the US dollar. Before this latest Coronavirus induced blast of recession, I thought we’d live through another 50 years of fiat hegemony. Now I’m not so sure.
What typically happens with the end of fiat currency? The government issuing the currency starts printing more and more and more of it in ever desperate attempts to stop an economic collapse. The more you print, the less it’s worth and it gets to the point of ridiculousness. The wheelbarrow full of cash to buy a loaf of bread is the primary example.
Before getting there, we will likely see debts grow larger and larger and inflation grow higher and higher. Other elements in civilization have helped to suppress inflation over the past 40 years such as a billion Chinese slave labourers working for nothing, automation via technological innovation, and a rapidly declining world fertility rate, but none of these things will stop the fiat collapse in the long run. As the US dollar inflates away its own value, there could be a push by other world powers to bolster their own currency with gold-backed assets. This will be exceedingly difficult, however, as the US demands hegemony and will fight back, kicking and screaming to ensure that doesn’t change.
Eventually, nobody wants the paper money and they look for more stable means of exchange. Typically, a new government with a new form of gold backed currency arrives to save the day and the old money becomes a relic of the past.
Until then… what is the average Joe to do?
My first piece of advice is to avoid the Peter Schiff gold-bug types. They are chicken little schills that never stop hawking gold. They aren’t entirely wrong, but you can waste your whole life waiting for the big day when your little pot of gold makes you the new Scrooge McDuck. There is an internet industry out there trying to sucker in people looking to beat the system by putting their faith in their coin collection. It’s a dead end.
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If you want to buy some physical gold, go for it, but it shouldn’t be central to your plan. If civilization collapses to the point in which your little gold coin collection is going to make you rich beyond your wildest dreams, then you’ll probably be better off investing in bullets and butter because that sort of collapse is going to crush everything in its wake.
The most important thing to do for ordinary people is to begin staying out of debt. We’ve grown accustomed to cheap interest rates and all the trappings that go with it. Living beyond your means is a seductive trap. The toughest argument against paying down debt has been the lived experience of so many people over the last thirty years. Debt has been manageable and payments low. Living for today at the expense of tomorrow is a cheap drug.
But things are changing.
Get out of debt. Pay off your mortgage. Pay off your car. Pay off your credit card each month like clockwork. We’ve seen how precarious people have been living with excessive amounts of debt. Don’t let it happen to you. Pay it down. Pay it off. Keep it away.
When you’ve got some savings where do you put them?
Many Canadians put their money into “High Interest Savings Accounts” or GICs. Both are bank products that provide interest rates below the rate of inflation. In other words, the longer you leave your money in these accounts the less it’s worth. Eventually the value of your savings will be next to nothing. Fiat currency doesn’t hold its value and saving cash instruments doesn’t provide you with security.
You might be able to find a GIC that provides interest barely above the inflation rate, but there are better options. Having said that, it doesn’t hurt to have a nest egg of liquid cash or investments. Anything is better than nothing.
Another option is bonds. Bonds have the same problem as GICs in that the rate of return is often quite low. Buying a bond ETF is probably a better way to go. If you are trying to avoid fiat currency collapse though, a bond is nothing more than a debt instrument that may eventually not keep pace with the currency collapse itself. In the meantime, governments will back stop the bonds inherit worth so it’s probably a reasonable way to ride a collapse, especially if the collapse isn’t total.
Another option is stocks/equities. In this case the risk is greater because volatility is greater, but at least you can own a piece of a real and productive company. Currencies can come and go, but the technology, assets, manpower, patents, and products that successful companies hold will always make them valuable. Buying broad indexes in the form of ETFs is usually the safest plan, but that may not be the case in terms of fiat currency collapse. Buyer beware.
Houses seem to be a slam-dunk in the hearts and minds of Canadians everywhere. The old notion of buying a place and fixing it up and renting it out and letting your tenant pay your mortgage is always glibly announced as a genius move, but I’ve heard too many tenant horror stories to ever want to get into the property markets. Regarding fiat currency crises, housing usually crashes along with the economy and the currency to purchase it. It’s hard to turn four walls and a roof into spending money when money itself is dissolving. Houses are illiquid and like any other consumer product…of depreciating value unless money is spent on upkeep. Buying a house for yourself makes sense, but an attempt to be Mr. Monopoly when currency becomes as valuable as the money in the board game is nothing but a boat anchor.
"If you want to buy some physical gold, go for it, but it shouldn’t be central to your plan."
Is there a need to become a hardcore “Prepper”?
You could do that and if the zombie apocalypse ever hits you can sit back and say, “I told you so.” The reality is that currency collapses can happen without total destruction of civilization. Times get hard, but not necessarily as hard as Viggo Mortensen in The Road. If you want to be a Prepper, by all means, fill your boots. If you’re an average Joe looking for more security, you could try being a Prepper minus 50%. It doesn’t hurt to have a storehouse of staples and necessities. Then you’re not the frantic idiot out at Costco trying to horde toilet paper and ground beef at the last minute.
The important thing to do is avoid the pitfalls that so many of our fellow citizens have made into a way of life. Live within your means, set aside some savings, store some staples, get out of debt, invest some surplus, connect with a network of friends, family and community, start a small gold coin collection and aim for more self-reliance. Do all these things and you’ll be well positioned to transition through the coming currency collapse…whenever it arrives.
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