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The End Game for Fiat Currency

The End Game for Fiat Currency

Predicting the inevitable demise of a fiat currency cycle is neither bold nor incendiary. For thousands of years, every fiat currency cycle the world has ever known started and ended the same way. It happened during the Roman Empire with the Denarius, in China during the 11th century with paper “flying money,” in France multiple times beginning with infamous central banker John Law’s Banque General, in the early USA with paper Colonials and Continentals, and perhaps most famously in Weimar Germany with the Mark after WWI. All fiat currencies eventually collapse, and largely for the same reason: the issuing government becomes over-indebted and abuses its privilege by debasing its specie or over-printing its money, which results in a logical collapse of confidence. Timing the ultimate demise is difficult, but having confidence in its inevitability is not.

Cycles are a basic natural phenomenon and are thus unavoidable. For money, the cycle always begins with “hard” currency containing or backed by a physical asset, typically a valuable commodity like gold, copper or silver. Users of the currency have confidence in its value because they know it is or represents a certain amount of something tangible. The medium of exchange is trusted, transactions occur, the system runs smoothly and the economy grows. Eventually, the issuing government becomes over-confident in its success and grows tired of dealing with the constraints this hard-exchange requirement places upon its ability to borrow, spend and expand.

Enter fiat currency.

It is at this point in the cycle that the issuing government decrees by fiat (“let it be done” in Latin) that its currency is no longer exchangeable for any tangible asset or commodity, but is instead backed by a promise that the government is “good for it” via its taxing authority or other means. Thus, the money transitions from hard currency to “legal tender” fiat currency, with no intrinsic value beyond the word of its issuer.

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