Fiat money – Eliminate

Why fiat money is so wrong

Fiat money is not honest money. It is a paper currency backed by nothing. That in itself is fine. I have no problem with fiat money, electronic currency or any other medium of exchange. Just remember, money is a cipher. The problem is the government monopoly on money causes business cycles and economic pain. The easiest way to control issue is to eliminate fiat money, that is the Fed’s power.

  • Fiat money is creating money out of thin air and distorting the capital structure, creating business cycles, driving up debt and increasing inequality manifest by the Gini coefficient.

In 1971 Nixon took the world off the International Gold Standard. This Nixon shock eliminated the Brenton Woods pegging of the dollar to 1/35 the value of a troy ounce of gold.  Nixon was not one of our greatest presidents. Specie-backed representative money becomes the norm.

However, the real chaos started in 1913 with the creation of the Fed and a monopoly on legal tender.  Read what the government has done with our money: US fiat money.

Federal reserve system alternatives to control fiat money abuse

Money is a medium of exchange. In economics the market for money is the most important market there is, because disequilibrium in the money market cause business cycles, otherwise known as recessions, depressions, panics, and crises. The solution is easy, find an alternative to the US Federal Reserve bank.

In this post, I give two ideas.

I like listening to guys like Alan Greenspan and Ben Bernanke on TV. They sincerely try. They are ethical in actions and calm in demeanor and use such nice flowery economic vocabulary. I would trust those guys if I knew them personally or with a business dealing. However, to micromanage and fine-tune the economy of the United States, no way. Not a chance. It is foolish to be lulled into a sense of security with their charm.

Do you think eliminating the Federal Reserve system and replacing it with real non-fiat money is radical?

Think again. The problem with having a Federal Reserve and a government monopoly on money is:

  • Historically the Federal Reserve has missed every impending crisis and in fact, made it worse, recent examples are fueling the Internet stock bubble or the Crisis of 2007. Historically the Federal Reserve caused the Great Depression and prevented the recovery.
  • The Chairman of the Federal Reserve bank, as well-intentioned and educated as he does not have the ability to predict the demand for money. In fact, predicting the weather two years in advance would be easier as there are less exogenous variables. Believe me, I am a smart guy and I could not even predict money flows. It is hard enough to predict the price of one stock, let alone aggregate macroeconomic indicators. He is no one special, just an academic with an opinion, but responsible for all our economic lives.
  • Money supply policy usually has a long lag factor, so actions by the Fed today might not be seen for two years and this will exacerbate business cycles. It does not work even if you could predict it.

If I did not convince you to do your own research on the history of business cycles or use your own judgment about the economy now. Abolish the Federal Reserve system and we all will return the US to prosperity. The easiest way to eliminate the Fed is a return to hard currency. It worked for thousands of years. With hard currency, you do not have hyperinflation. Countries go on Fiat money when they run out of options like the US issued greenbacks during the civil war. It is not something that should be the accepted norm.

gold non fiat money
Beautiful gold coins

Eliminate fiat money – Return to the gold standard – Federal Reserve alternative I

Fiat money is paper money backed by air. Or in the US the ‘full faith and credit of the US government’. There is no commodity backing the currency. The dollars value is based on what people think it is worth, rather than intrinsic value. Normally I have not a problem with this as every commodity or thing in the world has subjective value, based on supply and demand.

The supply of gold increases pretty steadily about 2% a year which matches the 150-year historic growth rate of the USA. Therefore, coincidentally this seems like a match. Even if the rate was different it would not matter actually.  Further, in times of panics, money is backed by gold and fear is less.

The problem is when the government can increase the supply of fiat money at will instead of normal market forces, it is open to abuse and miscalculation. Again just think of history from the inflation of the 1970s to the crisis of today. The Fed’s quantitative easing will destroy the value of the dollar.

Free money – Allowing competing currencies – Federal Reserve alternative II

Why is free money, that is competing currencies, a good idea? Right now it is illegal to use anything but dollars in the USA for financial transactions. This is the US government monopoly on money. But if other issuers could issue money, backed by commodities such as gold and silver, such as in the free money era in the USA in the 19th century, you will have a self-regulated money supply. This means fewer business cycles and steady growth.

The crisis would end as prices would adjust. If there was something called free money, banks could issue currencies backed by gold or silver, markets, not the Federal Reserve would control the supply and demand for money.

I personally prefer free money, rather than a gold standard. However, a return to the gold standard is a step in the right direction. Ron Paul at times might seem eccentric but he does understand economics. Ron Paul on fiat money, eliminate it.

Fiat in Latin means let it be done

Do not let it be done to you or the USA. Do not let the Fed just do whatever it wants. The US needs to implement something other than the Federal Reserve system is with the end of the government monopoly of money the US government must be more responsible in financial spending. The debt cannot be inflated by quantitative easing or printing money. This means returning the USA to freedom and prosperity. Finding a viable alternative to the Federal Reserve and eliminating fiat money is a practical and philological issue. Do you trust the government to manage your money or you?

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6 responses to “Fiat money – Eliminate”

  1. Greg

    Interesting and yet very confusing. So fiat money basically says that future generations will be working for the government via their tax liabilities. In essence, once the economy recovers, the government shall recover its fiat money through its tax system?
    Some of what you say here might be oversimplification. For example, the economic expansion with these bubble are now being papered over. Could it have been that the driving force behind this recession was fuel cost. And if gas prices were 1 dollar per gallon verses 3 dollar per gallon is it possible the housing bubble would not of burst? Or was it possible that the speculation in oil markets was the final straw on the camels back? What are the checks and balances in the present system that prevents national security issues(i.e. access to energy at reasonable cost) from wrecking the economic base.
    It all sound easier said than done. Basically there appear to be an apparent economic free for all with no one at the helm of the ship.

    1. Mark Biernat

      Fiat money is not all that bad, if for example, the Fed said it would increase the money supply 2% a year without bending perhaps. The whole objective here is to reduce or eliminate business cycles or at least the ones caused by monetary miscalculations or shocks. The idea is not to micro manage the economy with monetary policy or as history has shown it will exacerbate the booms and busts.

  2. Greg

    So lets say the Fed increases the money supply by 2% and the economy doesn’t grow but contracts as real price fail to rise. High unemployment forces people to spend less and there is little inflation. Perhaps deflation. Can the Fiat money be recovered? Will this perhaps force more difficulties upon the natives? Maybe the natives just don’t have any value or purpose for the system anymore.

    1. Mark Biernat

      Deflation is not a bad thing. That is a myth. Deflation is about prices adjusting to their proper levels, even wages. Without wages and prices adjusting then you have unemployment as it becomes too expensive to hire people or keep people for the currently level of sales. Deflation is a symptom of unemployment not a cause. It means the economy is trying to adjust via prices.
      The best solutions in this order is 1) free money or competing currencies. 2) gold standard. 3) Some benchmark for the Fed. Some people say 2% some people use a factor of nominal GDP, something like this
      If the economy does not grow but contracts you have to first ask why? In the great depression of the 1930s or the great recession of today, it was caused by excess money expansion. Without that credit boom, the cycle would not be as deep. Therefore, there will always be business cycles but not on the scale we have seen them. In fact the Austrian economist would agree that business cycles are cause mostly but not always by shocks in the real economy from monetary disequilibrium. If you eliminate the monetary shocks with a rational monetary policy, ie abolish the Federal reserve, then the cycle would not be so deep.
      Further, if you have deflation and unemployment, the best solution is a market solution, as government does not create jobs but the entrepreneurs do.
      Monetary stimulation will only exacerbate the cycle.
      For example, lets say Ben Bernanke fixes the economy with quantitative easing. Not good for me. I want to buy a house. He inflates and props up housing prices. Also, what he is doing now to create a ‘soft landing’ (I herd that before), will only come back and bite us in a few years with a new cycle. There is too much of a lag in monetary action. What he is doing now is affecting the economy in a few years. Any recovery we have seen is not because of his action (just look at Japan 20 years of trying), but because it is naturally recovering, but he takes the credit.
      It is a very bad idea to micro manage the economy with monetary policy. Let the markets work. This is why Fiat money is bad. Not because it is bad in itself, but because the government can not help but to try to micro manage it, which makes it worse.

  3. Adam

    “if for example, the Fed said it would increase the money supply 2% a year without bending perhaps’

    Mark; Is the money not created first by the treasury?
    They spend before they borrow.

    1. Mark Biernat

      You are right, the Treasury prints currency. It is also spend faster than they can collect or print it. The Fed just expands the broader measure of M2 and M3. People are not happpy with the idea of the Fed because they do not like the idea that the government from the top down tries to steer the economy.
      The Treasury does coin the money but the defintion of money is more expansive and that is where the Fed come in.

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