As discussed in the first post in this little series, the very root of the economic craziness we have witnessed over the past decade or so is our totally unbacked fiat currencies. These little pieces of paper and plastic we use to buy things with can literally be conjured out of thin air through a number of mechanisms, thereby giving certain members of society the godly power of creating money. And yes, absolute power has corrupted absolutely as it always does.
The direct result is that we find ourselves at the point we are today: a developed world burdened by unpayable debts and impossible social welfare obligations at a time when natural barriers to growth are becoming increasingly serious. In essence, this situation arose because fiat currencies allowed developed world citizens to live way beyond their means for decades by simply creating fiat money (public and private debt) and using it to buy stuff from developed countries. Now the bill is finally coming due at a time when our strained ecosystem is no longer capable of providing the cheap resources needed for paying it.
The first thing that therefore needs to be done to start restoring balance to this crazy system is to remove our totally unbacked fiat currency system, thereby taking away the ability of governments and banks to grant developed world citizens the ability to live so far beyond their means. Our fiat currency system is deeply ingrained in our society, however, and it will be very hard to uproot, primarily because people really like living way beyond their means. In fact, politicians get elected based on promises of more spending, more welfare benefits and fewer taxes which would not have been possible without the ability to create money out of thin air.
However, now that living standards in developed nations are turning downwards (seen above for the USA), people may just be open to some alternatives. The most promising of these seems to be the idea of allowing for gold/silver-backed currencies to compete with our current fiat currencies. If these currencies are allowed to penetrate freely into the market, people will have the convenient choice between a currency that will undoubtedly store the purchasing power you have earned through honest labor or one which is rapidly losing your purchasing power due to gross fiscal irresponsibility across the board. If you have learnt just a little bit about these issues, it is pretty clear which one you will choose.
For this to happen, however, people need to get educated to the point where they understand that the faith in their fiat money (which really is the only thing giving it value) is quickly being eroded as more and more people understand the risks of counting on fiat currencies as a store of value. This process is a self strengthening spiral which can turn the financial futures of hundreds of millions of people completely upside down. Don’t allow yourself, your family and your friends to be caught napping on this one.
The final post in this little series starts here.