Archive from March, 2015

Fiat Currency System

100Trillion Dollars

Do you know what Fiat Currency is? You used it every day!

The technical definition is “paper that the government has declared to be legal tender that is NOT not backed by a physical commodity” ie Gold.

This paper (or in the case of Australian money its polypropylene polymer) that we all use- as if it has intrinsic value, (which it doesn’t) it only has value because other people will exchange it for a commodity or service of REAL value like food, petrol, air plane ticket, pay taxes and bills. It only has value while we have confidence that others will accept it as payment for what we really want and use.

There is about 167 official national currencies circulating around the world, even though there is 196 countries in the world – 19 counties use other nations currencies.

No one really knows how much of this “Paper” currency is floating around the world but in 2010 it was thought to be close to $55 Trillion US dollars – ($13 Trillion was in USD currency as at June 2013)

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency succeeding. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.

Founded in 1694, the British Pound Sterling is the oldest fiat currency in existence. At a ripe old age of 321 years it must be considered a highly successful fiat currency. However the only reason why it has existed so long is because it was often pegged and exchangeable for gold and silver. A British pound coin was originally weighed as one troy pound of sterling silver! This is why it is still called Pound Sterling – but there is nothing sterling about it now, because in March 2015 it will cost you 164 pounds to buy 1 pound of silver!

So now it’s worth is less than 1/164 or 1.6% of its original value. Therefore the most successful long standing currency in existence has lost 98.4% of its value.

gold

US Gold Backing

Only 56 years ago in 1971 the US dollar was fully exchangeable for Gold Bullion, which was the requirement of the agreement made at Bretton Woods during the post 2ww global financial reconstruction. In 1971 it cost $1.8 USD to buy 1 ounce of silver and $ 40 USD to buy 1 ounce of gold. In March 2015 it costs $1289 USD to buy 1 ounce of Gold and $17 USD to buy an ounce of silver.

What happened in 1971 – every economics follower would tell you it was the year Nixon took the US Dollar totally off the gold standard and refused to honor the agreement to redeem US dollars for gold. That was the beginning of a massive growth in inflation, the sign the US and the west was beginning a steady decline in living standards and purchasing power.

Today there is about 120,000-140,000 metric tons of gold above ground in the world and about 2270 tons of gold is mined out of the ground each year. Interesting China No 1 and Australia No 2 are the two top gold producers today.

The US Gold Reserve is supposed to be just over 8,000 tonnes – which is about 6% of the total gold ever mined. It is worth about $200 billion, or 1.8% of the US national debt. Total US Debt (State and Federal) by end of 2015 is expected to grow to appox $22 Trillion.

Conclusion

This means that roughly 4.46% of US dollars in circulation are ‘backed’ by gold, the rest backed by false promises and goodwill.

Simply put, the price of gold would have to rise 20-25 times in order for the US and British governments’ gold assets to match the supply of money in circulation.

History has a message for us: No fiat currency has lasted forever. Eventually, they all fail.