What Is Fiat Money? How Does Fiat Compare To Gold

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What Is Fiat Money? How Does Fiat Compare To Gold

The Trouble With Fiat Currency

Today’s global economy comes with some benefits and some weaknesses. Governments around the world compensate for some of these wild swings by playing fast and loose with the value of their currency. Unfortunately, the United States is one of them.

One of the most common tricks up their sleeves is to use fiat currency to free up monetary circulation. Now if you’ve never heard the term Fiat Currency before, it is certainly worth a closer look.

When we say Fiat, we don’t mean the Italian car company selling hot-hatchbacks. Yet the word Fiat comes from the Latin mother language and translates loosely into “let it be done.” When it comes to the financial world, it means that your paper money and balance sheets are backed by the full faith of the United States government.

On the flip side of the dollar bill it also means that fiat currency isn’t backed by any tangible asset. In the past the American dollar was backed by gold. Under the gold standard every single penny and dollar bill was assigned to a specific value of gold being stored away in secure government vaults.

However, the United States started slowly weaning the economy off of the gold standard between 1933 and 1971, claiming that the slow influx of new gold was hampering economic growth opportunities. During that transition period gold was not always backed at a 1:1 ratio. At one point the dollar was 40% backed by physical gold and the other 60% was not.

Since the total abolishment of the Gold Standard in 1971, we have none the less seen the value of US currency decrease and a larger and larger flow of unsecured money flows into the marketplace. Any unsecured monetary value is simply added to our growing national debt.

Simply granting any government the ability to spend more than it brings in inevitably leads to increasingly diluted currency and rising inflation. Despite the eloquent Latin translation Fiat ultimately means a currency is faulty.

Even when inflation is low, it still continues to slowly accumulate over time. One can see this long-term trend by looking at the Consumer Price Index, which has risen 50% from the year 2000 to the end of the third quarter of 2018.

This monetary dilution effect is all too common once a nation starts using a fiat currency. As it continues to progress it eventually forces prices up as an increasing number of financial institutions give in to the temptation to use the currency to solve their financial dilemmas.

When we look at fiat currencies through historically they inevitably fail. This means that even if you diligently save your money, and start shoving dollar bills into your mattress or burying boxes of cash in the yard, your purchasing power will still gradually erode over time.

Can Gold Combat Fragile Fiat Currency?

Before the United States government started playing fast and loose with fiat currency our money was backed by gold and in some cases silver. These precious metals retained their value as well as their utility over time. Historically gold has always served as a superior long-term value compared to other fiat currencies.

Without an established international gold standard, no government is restricted on the amount of money they can put into circulation. This includes the once might, yet now diluted US Dollar.

Looking into the future some economists project a restart or reorganization of the US Dollar by as early as the year 2020. In these scenarios the value of physical gold not only sees an increase, those possessing physical gold or gold investments also tend to have more active liquidity to get through the economic distress.

While there is no crystal ball into the future, it still remains a good idea to invest and possess gold and other precious metals. The rewards can go beyond simple liquidity and personal value, should world markets also start to trend back to the sound backing of a gold standard for their currency.

By |2018-11-12T12:43:22+00:00November 12th, 2018|investing|0 Comments

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