In the previous writings, I stated that a fiat currency always fails, earlier or later.
In fact, according to a well-known monetary historian and finance educator, Mike Maloney, the average life expectancy of a fiat currency is 27 years. It all began with Mike’s family accountant. Failing account, to be accurate. He was the one who motivated Mike to study the history of finance. After devouring loads of ancient and not-so-ancient information and taking travels to historical spots, he noticed one thing. All fiat currencies fail. That is, return to their default value of zero. Some survived for centuries, others only for months. And after their collapse, eventually there is a return to original medium of exchange – gold and silver.
Mike presents his findings in the engaging series called Hidden Secrets of Money. The episodes are available on Youtube. He also compiled his accumulated financial wisdom in his book “Guide To Investing In Gold & Silver”, the bestseller. To be transparent, I must say that Mike owns GoldSilver.com, one of the largest and most respected precious metals retailers in the world. This might seem like a serious conflict of interest. But to justify him – he started the company after his studies.
Unfortunately, besides Mike’s private findings you would not find a lot of official research on this subject. The reasons behind are obvious. If more people are aware of true nature of fiat currencies, more would want to try to do something about it. Governments simply do not want to finance the accelerated break-up of their own fiat systems. However, according to Goldsilverworlds.com article on fiat currencies someone named Vincent Cate did a similar research. They claim that his findings were presented by a reputable macroeconomist and sound-money educator David Morgan, at the Silver Summit in 2012. A total of 599 currencies out of 775 that he analyzed failed. Out of them, 30% ceased to exist as a result of economic reforms, 28% were destroyed by war events, 27% were destroyed by hyperinflation and 15% were destroyed through various acts of independence. But, interestingly, in response to this same article, in a comments section, somebody with an avatar “Vincent Cate” writes “But I did not do any research in which 599 different forms of paper money have been analyzed. So you are crediting me with something I did not do.” Is that Vincent Cate himself? Saying a truth or abandoning his own work? A random person trying to discredit the findings that disclose too much information that general public should not know? There are no definite answers to these but they don’t really matter anyways. Even assuming that this research didn’t exist, at the end of the day, it is not hard to see without any hard-core research that fiat currencies are indeed destined to fail. If you do a bit of digging through older books in a library and past Internet news you would see that many failed in the course of your lifetime. For example, since 1980, in the last 37 years, a total of 19 currencies went through devaluation and now are obsolete. Below are examples of some of these currencies (with a country of origin and life span in brackets).
Kwanza (Angola, 1991-1999)
Old Belorussion ruble (Belarus, 1994-2002)
Peso boliviano (Bolivia, 1984-1986)
Cruzeiro (Brazil, 1986-1994)
Old cordoba (Nicaragua, 1987-1990)
Soles de oro (Peru, 1984-1990)
Old Zloty (Poland, 1990-1993)
Old Leu (Romania, 2000-2005)
Old Russian Ruble (Russia, 1992-1994)
Karbovanets (Ukraine, 1993-1995)
Old Zaire (Zaire, now Congo Democratic Republic, 1989-1996)
Zimbabwean dollar (Zimbabwe, 1999-2007)
Why fiat currencies fail?
What causes a currency to fail? There seem to be a couple things – wars, reforms, colonies becoming independent… However, these are more triggers than causes. Just like if you have allergies, dog hair is a trigger, not an underlying cause of your sneezing. The real cause of any currency failure is its reckless and systematic introduction into circulation, or in case of coinage, its debasement with low-value metals. What for? To the public, it is made to look like it is done for three major reasons: to finance government spendings, pay off debt or bring the country out of recession. Either way, with time, introduction of more fiat currency into circulation dilutes its value consequently resulting in rise of prices, that is, inflation. People are forced to spend more and more to get access to the same products and services. This is while, their wages are not increased accordingly. Eventually, people lose trust in their ever-slumping currency and start to look in the direction of true stores of values, gold and silver. In this case, governments have nothing left to do but to follow the people. The pattern from fiat currency to precious metals and back again in a way is a life cycle that money undergoes.
That’s exactly what US does today. It massively introduces its dollars into circulation. Remember, we talk about the US dollar because it is a main reserve currency nowadays and all other currencies are pegged to it. To fight recession, US employs money “printing” more than any other remedies (e.g. increasing government spendings or raising taxes). Although the point when masses start to invest in gold and silver hasn’t be reached yet, US is getting close. If curious to see how close Mike Maloney sees it to be, look here. The pumping of fiat dollars into circulation is done through what seems to be an overly-complicated process with a fancy name – quantitative easing. Just to confuse the general public. Quantitative easing or money “printing” is happening every time when central banks issue bonds (IOUs) to commercial banks or investments funds. For example, in the recent years, US did three rounds of quantitative easing – in 2008, 2010 and 2012 – to mitigate the consequences of the 2008 recession. Ironically, US did it even while being on the gold standard, before 1971 (US is an expert at being a hypocrite 🙂 ). At the beginning, quantitative easing does stimulate rise in demand, bringing GDP and consequently the economy from its knees. However, if done in excess and regularly this has serious repercussions on the health of economy. The one that you want to care about, already mentioned several times on this blog, is obviously inflation.
Printing to rescue the economy?
Let’s take a step sideways and look at quantitative easing from the observer’s point of view (although it is hard to be a neutral observer in this age of globalization). The US employs quantitative easing as the main way to take the country out of recession. Do you really think it is done because it is the optimal way to go? And with the wellbeing of general public in mind? At the end of the day, it doesn’t make your life easier, which actually should be the goal of any government. It even makes it worse. My opinion, is that quantitative easing is good for a small group of people who control the central banks, that is, the Federal Reserve. It is a handy way to confuse and control the masses. If you control money and more so, if you control how money is created, before anything else, you control food and shelter and thus the lives of people.
Just think about it, when grown up men use money “printing” as a fundamental way to get the country’s economy out of trouble or claim a fiat currency to be superior just because it allows to do so – that is a joke. It must be one of two – either they are not very smart or they think that others are not very smart. Because it is highly unlikely that those placed in the upper half of a ruling pyramid are not smart, it must be the second – they think that others are not smart. Are you not smart? You may think that majority of people don’t give much thought to such intricacies. Maybe, but that’s only because the direct link between quantitative easing and your life is not direct and therefore not clear. Large and small quantitative easing campaigns is a good old game that governments play and played, today and in the past. And you and me are not winning it. You are losing it because you lose your most valued asset – time.
Allow me to illustrate with a concrete example how money printing takes your precious time away.
Money printing takes away your most precious asset – time
In US, from 2006 to 2016, the average annual inflation rate was 1.89%. It means that on average, each year prices of goods and services rose by 1.89 % from a previous year. Suppose, in the beginning of 2006, you put aside $10,000 for your child’s post-secondary education. By the end of 2016, the worth of your savings as a result of inflation would have reduced to $8,292.4. You lose $1707.52. Suppose, your hourly wage is $30. That’s 57 hours or 7 hours of your life dumped into non-existence – “made” to be vanished. Well, sure, you can invest it. Let’s say you invest it somewhere and earn 1.5% annual interest. By the end of 2016, inflation and interest adjusted, you would have $9,623.76. You lose $376.24 or 13 hours of your life. Much less, still how come? What right does a government have to take your earnings, your time, away? And in such a hypocritical manner? Do you remember yourself doing something like that to a government? Not talking about borrowing, whatever you borrow, in some way or another you give back.
Now, do you want to know how long does it take for a government to create these same $10,000? Just a bit slower than a lightning strike. You count how much it takes you to type “10,000” with a keyboard. Forget about bothering a printing press – too much work – majority of money today is electronic. Central banks don’t issue bonds to banks in cash! Of course, if you could create money that fast or near that, poking government for creating inflation would not be fair nor it would make sense.
As you can see when governments “print” money you lose whatever you earn due to inflation. And because you exchange your time for money, your lose hours of life, basically. Of course, this cannot go indefinitely. Eventually when majority of people realize this… this is when currency will start to lose its credibility which ultimately will result in its collapse.
If after reading this, the link among fiat currencies, their “printing” and your time is less fuzzy, then my time spent writing this post is far from worthless 🙂 .
Farrokh Langdana and Peter T. Murphy. (2014). International Trade and Global Macropolicy. New York: Springer.