muses of the moment

March 10, 2009

It’s Built into the System-Part 1 (updated)

The fiat currency system causes the bad kind of inflation.

In order to understand the financial crisis that is occurring, there are a few things that you need to understand.

The United States likes to print and create money to give the illusion of growth. They are able to do this, because legally, they can. Through the Federal Reserve Bank and since the US Dollar is not tied to any form of value, like gold, or any restraint, the government can create money without any cap on its supply.

A fiat currency system, used in this way, will create inflation and decrease the purchasing power of that currency. It is happening now in the United States and hyperinflation is just a matter of time. Zimbabwe is an example of the government printing too much money. It has caused the currency to be worthless and inflation to double every few months.

Fiat currency is money (either paper cash or credit that is borrowed into existence). It is not tied to anything of value except the goodwill of the nation printing it.

How does this affect you and your money?

The government can control the amount of money they print, but they can not control where is goes or how it moves. Printing money will always end up as inflation in prices down the road. It slowly destroys the purchasing power of the currency. Since the Federal Reserve’s conception in 1913, the US Dollar has lost 93% of the value of the goods and services it can buy.

Some would say that inflation is good because the price of assets have increased by 93% in tandem. That’s a nice idea, but there are two problems with that statement. One, it just means that assets have increased with expenses, or broke even. Two, if you don’t own assets, you are screwed.

In the 1950’s and 1960’s, a family of four could live off of the income of one family member, usually the father. By the 1970’s thru today, there must be at least two bread winners for a family of four to live in the same fashion. That is the horrible effect of fiat currency on the culture in the United States.

You will notice in the graph below that if you had your savings or 401K funds in the stock market (as a whole), you have not made any headway since 1995. You will also notice that on stock chart not adjusted, there was an all time high in 2007 at 14,000. In reality, inflation stole any of the rise in the stock market from 2001 to 2007. In reality your investments just regained their purchasing power from the 2000-2001 drop in the market, even though the price of that stock was almost twice as high.

Inflation will steal your profits

Inflation will steal your profits

There is a distinction between the cost of something and the value of something.

Fiat currency is designed to give the illusion of more value when there isn’t any added value.

It is guaranteed that the government will continue to print money, whether it is a lot or a little, inflation will continue to steal your savings and investment gain.

Make sure you are valuing your investments adjusted for the real rate of inflation or you will come up with a distorted value of your return on investment. It will impact your life in retirement, because your money will buy less than you thought it would.

Fiat currency’s partner in crime is the fractional reserve banking system, stay tuned…..

Create a free website or blog at