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What is Fiat Money?
By admin | May 16, 2009
Fiat Currency and Fiat Money Explained… By Peter Macfarlane
You’ve probably heard experts on this site and elsewhere talking about Fiat Money… Fiat Currency. But what does it really mean?
No, it has nothing to do with Italian motor cars! The only Italian connection is the Latin language, from which the word fiat – meaning command, decree or order – is derived. My Chambers dictionary defines fiat currency as follows:
Money (paper or coin) made legal tender and assigned a value by government decree, with a commodity value lower than its face value, not convertible into any other specie of equivalent value, and generally with a lower purchasing power than nominally equivalent specie…
In other words, it is a currency whose usefulness results not from any intrinsic value or guarantee that it can be converted into gold or another hard asset, but instead from a government’s order (fiat) that it should be accepted as a means of payment.
In the case of the US dollar, for example, the currency is not backed by gold, nor by anything else for that matter – other than the world’s confidence in the US economy.
Now imagine if your business had a client – let’s call him Sam – who had always appeared wealthy and had been a reliable payer over time. So you always extended him all the credit he wanted. But little by little, you see he is getting further and further into debt, and you start hearing rumors elsewhere that things are not going to well for Sam, economically speaking. You will grow increasingly concerned, right?
At some point, you are going to start putting limits on Sam’s credit line. And that’s what is happening in the rest of the world these days to the ‘full faith and credit of the US government’ which is what backs the US dollar.
The US dollar is subject to the order of the US government , which in turn has delegated running the currency to the various Federal Reserve banks making up the Federal Reserve System (do you remember how on older dollar bills, you could see which of the Federal Reserve Banks emitted that specific bill – but newer bills just say ‘United States Federal Reserve System’?) The Federal Reserve Banks are private corporations owned and run by a secretive group of bankers. (You’ll find more at my Offshore Banking and Asset Protection blog if you want to explore this – I won’t go into it more here, although it’s a fascinating topic…)
Around the world, fiat currency is owned by its creators, the Central Banks. The Federal Reserve, the Bank of England, the European Central Bank and so on. It may be encumbered by its creators. That means they may, and most likely will, use it as security to borrow more money.
What’s the opposite to Fiat Currency? Gold bullion, of course. Gold Bullion is owned by its holder, YOU. The last thing any government wants to see is a return to money consisting only of gold and silver coins. Why? Because no government can control the world supply and demand of gold bullion. Governments are scared of losing control of the financial system because – well – money is power! Have you ever heard of the Golden Rule? It’s simple. He who has the gold, makes the rules!
Fiat Money is effectively a giant ponzi scheme. Just like ponzi schemes such as Madoff’s or Stanford’s, you can make good money from them, provided you take your profits and pull out at the right time. If you have your money in dollars and pull out at the right time, you might make great real purchasing power gains. But you are doing so at the expense of others who get in after you.
The above article was originally written for The Gold Report: How to Buy and Hide Physical Gold Bullion Offshore by Peter Macfarlane. Also check this page for more interesting articles on Gold and Silver Investments.
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