Fiat “money” is currency backed by nothing more than faith. This assurance rests on the assumption that when it’s spent, the value will be such that you can reliably purchase something desired – something valuable. Nothing other than confidence causes a person to keep it in their wallet/purse/bank account. Notice the “con” part of that word!
In virtually every case so far, the issuance of a given paper currency has led, down the line, to a decline in purchasing power to the level of its intrinsic value – the ink and paper it’s printed on – essentially nil. Some currencies have ended up in history’s dustbin by incinerating their worth to the point that not even adding a series of zeros – nor as Venezuela has recently done, subtracting zeros – can make them functional. If the melt-down continues long enough, the country of issuance may reach the point where they can no longer even pay the printers to manufacture new bills. Such was the case with Zimbabwe which, once again, without the value of hindsight, now looks like it intends to repeat its mistake.
Others, like Venezuela, haven’t gone completely over the value cliff yet but, with a projected inflation rate of one million percent by the end of 2018 – give ample evidence that its appointment with destiny cannot be much further away.
Some time ago, The Morgan Report’s David Morgan, coined the term “paper promises” to describe this historically unreliable tool for paying one’s debts, making investments, or putting food on the table. The issuing governmental body “promises to pay” when you attempt to exchange their script. The assumption is that there’s some kind of predictable relationship between the cost of the item to be purchased and the amount of tender written on the note. Unfortunately this is often not true.
In the U.S., since the establishment of the Federal Reserve in 1913, the purchasing power of the dollar- once considered “as good as gold”- and once backed by it – has now declined to about $0.02 cents. This is primarily due to the printing of new money (debt), conjured out of thin air. The bottom line, as David Morgan has further observed, is that “The Fed” creates something from nothing. Then they buy it back with nothing.”
In this manner, the government actually makes a profit… three times. First due to seigniorage – the difference between the face value of the currency and the cost to produce it; second because the resulting inflation continually cheapens the purchasing power of virtually all the existing currency, enabling the government to pay (or promise to pay) back the debt they have accumulated, in “money” that becomes less and less valuable with each passing year.
The third time is when an investor’s profit is taxed as though the original purchasing power was still in play. But with some of that profit actually represented by inflation, they end up paying tax on a phantom portion of the assumed profit.
Hence the “paper promise” to which David Morgan so poignantly refers. The very act of printing more un-backed currency, and running up additional debt, at first, little by little – obviates the promises made to the people. This can go on for a number of years, with few participants understanding what’s taking place. If their house “goes up in value”, if they “get a raise” at work, if they “make a profit” on an investment, they feel “wealthier”.
John Maynard Keynes’ philosophy of money management by which most of the world’s paper promise managers function today, got it. He said, “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Inquiring Minds wonder why “Keynesian Economists” never quote him on that statement.
Whence the “strong Bolivar”?
There was a time, not too long ago, in Venezuela, when the country’s currency, the Bolivar fuerte (“strong bolivar”), might not elicit derision – or the need to be carried around in a backpack and weighed on a scale before making a purchase. But now, along with the average weight of the decreasing number of its citizens who have not yet fled to neighboring countries declining by a reported average of twenty pounds each, it’s no longer a laughing matter, but one of survival. Here are some of today’s statistics as reported by news agency Reuters (Adjustable tomorrow, and *subject to availability):
*One chicken: 14,000,000 bolivars
*One roll of toilet paper:5,000,000 paper or digital bolivars
*One kilo (2.2 lbs.) of tomatoes: 20,000,000 bolivars
*One ounce of gold: 300,000,000 bolivars (as recently as January, 2018…25,000,000).
*One ounce of silver: 3,750,000 bolivars.
Inflation – which, in some measure, afflicts virtually all economies today – is not the only
element gnawing away at people’s purchasing power. Changes in the value of a country’s domestic currency in relation to its neighbors or to the world’s “reserve currency”, the U.S. dollar, can be just as devastating. Ask the citizens of Turkey, Iran, China, Argentina, or a host of others.
Maybe it’s time to get back to the kind of “money” that’s done a pretty good job of protecting people’s purchasing power for several thousand years – across geography, cultures, and historic time periods. Honest Money.
What the Latins called “argentum”, and after which Argentina was named. Now being designed, and soon to be launched for 21st century functionality as a decentralized cryptographic silver monetary system (CSMS), operating on the blockchain – with safety, accessibility, and immutability. Backed, not by “paper promises”, nor fated to be compromised into worthlessness by inflation, but by a real asset – .999 fine physical silver.