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    When Fiat Currency Stops Being Money

    Daniel Lacalle
    December 6th, 2021
    The Mises Institute
    Comments (10)

    This article was originally published by Daniel Lacalle at The Mises Institute. 

    Most emerging and developed market currencies have devalued significantly relative to the United States dollar in 2021 despite the Federal Reserve’s aggressive monetary policy. Furthermore, emerging economies that have benefitted from rising commodity prices have also seen their currencies weaken despite strong exports. As such, inflation in developing economies is much higher than the already elevated figures posted in the United States and the eurozone.

    The main reason behind this is a global currency debasement problem that is making citizens poorer.

    Most central banks globally are implementing the same expansionary policies of the European Central Bank and the Federal Reserve System but the results are disproportionately hurting the poor as inflation rises, particularly in essential goods and services, while fiscal and monetary imbalances are increasing.

    Many emerging economies have implemented a very dangerous policy of boosting twin deficits—fiscal and trade deficits—under the misguided idea that it will accelerate growth. Now growth and recovery estimates are coming down but monetary imbalances remain.

    Therefore, most currencies are falling relative to the US dollar. The policies implemented by global central banks are as aggressive or even more so than those of the Federal Reserve but without the global demand that the US dollar enjoys. If global nations with sovereign currencies continue to play this dangerous game, local and international demand for their currency will evaporate and dependence on the US dollar will rise. More importantly, if the Federal Reserve continues to put its global reserve status to the test, all fiat currencies may suffer a loss of confidence and a move to other alternatives.

    If the private sector does not accept this currency as a unit of measure, a generalized means of payment, and a store of value backed by reserves and demand from the mentioned private sector, the currency becomes worthless and ceases to be money. Ultimately, it becomes useless paper.

    Examples of state currencies that are neither a store of value nor a generally accepted means of payment are many. From the sucre in Ecuador, which disappeared, to the Argentine peso or the Venezuela bolivar, the examples in history are innumerable.

    In Cuba, inflation is now estimated at 6,900 percent due to the lack of demand for a worthless currency with no real demand or reserves to back it.

    Once this sort of thing happens, the state does not create money, it simply issues a means of payment—the currency—using the credibility of private sector demand to issue its promissory note. Like a debt issuer who loses repayment credibility, the value of this promise fades if the currency does not have private backing.

    More importantly, the value of the currency and its use is not decided by the government. It is decided by the last private sector agent who accepts the promise of payment because they assume that it will maintain its value and its acceptance as a medium of payment.

    As such, when a government creates many more of these increasingly worthless promissory notes, far outstripping the real local and international demand, the effect is the same as a massive default. The government is simply impoverishing the citizens, who are forced to use the currency, and destroying the credibility of the value of the government’s promissory notes.

    When a state creates a currency without real reserve backing or demand, it destroys money.

    When the government issues currency—promises of payment—that are neither a store of value nor a generally accepted means of payment nor a unit of measure, it not only does not create money, it destroys it by sinking the purchasing power of the poor captive citizens, who are forced to accept its notes and little pieces of paper (government officials, pensioners, etc.).

    This is what we are seeing in many nations all over the world, a massive salary and savings slash created by government intervention on the monetary balance to its own benefit. Governments benefit from inflation because they pay their debt in a currency of diminishing value and they impose a cut to the price they pay for wages and the services of the sectors that provide service to the issuer of currency. Even in developed nations with relatively stable currencies, inflation is a big benefit for governments that collect higher revenues from the money-based taxes (wage, profit, and sales taxes) … and a big negative for savers and real wages.

    Some say that workers may benefit because wages will rise in tandem with inflation. This is simply incorrect. Wages, at best, may rise with the consumer price index, which is a very weak measure of inflation and is a basket created by government bodies to lower real inflation in an average of combined goods and services. However, even if you consider the consumer price index, the vast majority of workers do not even see a rise in wages that compensates for the index rise. That is why median real wages are falling in the United States.

    Those who say that the state can always “create money and spend it”—and only has to create the money it needs to finance the public sector because it will be accepted by the rest of the economic agents—should be obliged to receive their salaries in Argentine pesos and enjoy the experience.

    INFLATION IS RUNNING AT 40-YEAR HIGHS!

    NEGATIVE INTEREST RATES ARE TAXING SAVERS, CREATING FOOD SHORTAGES AND MAKING LIFE MISERABLE IN THE UNITED STATES!

    There's Little Time Left Before the REAL DISASTER occurs!

    Download the Ultimate Reset Guide Now!

      Author: Daniel Lacalle
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      Date: December 6th, 2021
      Website: https://mises.org/

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      10 Comments...

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      1. Anonymous says:

        Fiat currencies aren’t going away.

        Precious metals are not keeping pace with inflation, in fact they are currently in decline.

        So put your money where it is safe, like in Euro’s and Bitcoin or stocks and real estate and such.

        There really isn’t much choice and trying to predict what will maintain or gain value is iffy at best, maybe just look at where Soros and his class of wealthy people are putting their money to safeguard it and do what they are doing.

        Success leaves clues.

      2. Woogie says:

        Ask yourself why the Central banks are loading up on Gold, (They control the prices) they are buying the most since 1967. So why they are keeping it so low to buy?

        They keep it loe to use Gold as reserves when the fiat currencies crash. They own more than 35,000 metric tons of it, That’s about $137 trillion in the supressed market today. When currencies crash, the value skyrockets—it is estimated to be actually worth 17 times that now, or $2,334,256,400,000. Wait until currencies crash and it tripples–do you want to miss out?

        I stay away from all crypto currency, there is nothing to hold with it as it is a fiat, and reports say Bitcoin is heavily invested with Evergrande which is bankrupt.

        If not metals, invest cash in land that can produce something— like crops, or timber that is to your benefit.

        Then for your survival, food storage, supplies to trade with, and pay off your asset held debts like mortages and cars or sell them.

        The Great Reset is planned to destroy all currencies to impoverish the people and start over. That brings fiat currency to $0. You decide what you will do. Be smarter than them.

        • Genius says:

          I agree with holding metals but I’m pretty sure they will be illegal to own for the common folk. Land is ok but the taxes must be paid or you won’t own it. Farming equipment is expensive too if your doing anything of scale and you will need a lot of water. Something to consider is investing in solar equipment. Panels, inverters, controllers are cheap right now and will be in demand. Crypto is garbage, stay away from it. The whole scenario is to do away with cash and go all digital, which will give them absolute control of everything. Plan your wealth preservation carefully and think out all the things that you will need to make it work. Black market/ barter will be huge. Learn to grow/ make herbal remedies. Learn to make booze/ fuel. Get the stuff you will need NOW! Failing to plan is planning to fail….

          • Genius says:

            One thing I forgot to mention, Something that looks good as an investment is “carbon credits”. They came out with them several years ago and big corps. were buying them cheap. I don’t know where to get them but they are available. This could be a currency of the future. Something to consider for sure.

      3. Spider25 says:

        Gold is money and everything else is credit!
        5000 years of a store of wealth to which gold has survived every civilization and economic collapse in written history! You must be diversified in this insane environment. Cash is trash as the saying goes. Gold, silver , crypto , stonks and lead are the way!
        I have a crappy 1972 condo that has shot up 20k in just two years. Land and real-estate both do well in inflationary environments to which we are headed. Plan accordingly!

      4. cranerigger says:

        The fictitious world that allows people to believe (via the “normalcy bias”) that nations may print fiat currency into oblivion is delusional. The Weimar Republic, Zimbabwe, and many other failed fiat currencies have demonstrated the folly. You say Modern Monetery Theory (MMT) sees the problem in another light. Good luck with that. Like “flat earthers” that thought ships sailed off the edge of a “flat earth” – these folks were amazed when the ships sailed back to port.

      5. Anonymous says:

        Is it too late to get into stocks.

      6. Genius says:

        Another form of currency that is totally acceptable is goldbacks. They are bills that contain different amounts of actual gold. These are lawful currency in Utah, Nevada, New Hampshire. They are perfect for small transactions and range from 1/1000 oz. to 1/20 oz. of gold in each bill. You will pay a premium for the minting of them at first but once you have them you have a lawful currency beyond the grasp of the fed. They are way cool, check them out at ” goldback ” dot comm.

      7. SlackMavo says:

        buy hunter biden paintings
        I hear the returns are phenomenal….

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