Tuesday, 8 October 2013

The crisis of fiat money

One of the best "conspiracy economics" related topics is the so-called "Crisis of fiat money".

This is the related to the bitcoin and gold posts and comes back to the fundamental underpinnings of paper money backed by nothing but government guarantees that are increasing being seen as worthless.

Enter the "crisis of fiat money".

It comes down to the simple issue of QE and the idea that printing stacks and stacks of money does not have a downside at some point in the future.  The QE experiment is exactly that - an experiment based on relatively poor theory.  The problem of course is that there is no counterfactual.  With no QE where would be?  It could be a lot worse.

What is currency debasement?  Are currencies being debased?

So how to profit from the upcoming crisis (if indeed there is one).  This is something we will cover - you can be sure someone is already benefiting and it is not average Joe.

If there is a total loss of confidence in the dollar (not helped by the shutdown) where is the best place to invest?  Is it gold, silver or bitcoins as many suggest on teh libertarian websites?

We will be tracking the money going into commodities during the future of this blog.

This argument is summed up nicely by Paul Singer over on Zerohedge.

Crisis of fiat money [Zerohedge]
 Next, Singer discusses about what is fundamentally at flaw - the current unsustainable monetary system - which itself is broken courtesy of what is now rampant, runaway currency debasement. The reason for the is that as a result of the terminal breakage of fiat's links with hard assets following Nixon's shuttering of the gold-dollar convertibility, "and after that it fell to central bankers, to the Fed, to maintain the demeanor, the policies, the words to give an impression of sobriety. And in the absence of any discipline in the numbers, because there is no discipline in the printing of the USD, that impression of sobriety is all that is standing between the holders of dollars and long-term holders of claims in dollars or any currency, and the oblivion of the purchasing power of their wealth."
Singer points out what most critics of the Fed are well aware of: that it was the Fed's low rate policy for a couple of years after the dot com bubble that resulted in the heads of the major financial institutions "kind of losing their heads in terms of their own balance sheets", the epic real estate and credit bubble and the great financial crisis of 2008; and fast forward 5 years later with the Fed once again keeping money sloshing around at effectively punitive rates (thanks to ZIRP and QE), and as a result "the conditions for a loss of confidence are here and now."

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