Wikipedia defines fiat money as money declared by governments to be legal tender and are issued without any backing of state assets. All national currencies today like the US dollar, Euro and Singapore dollar are fiat money. Many people still believes government cannot print money and must have equivalent amount of gold to back up the money it issues. On Augst 15, 1971 the US government under President Richard Nixon terminated the convertability of dollar into gold. The Bretton Woods systems officially ended and the US dollar became a fiat currency backed by nothing except the promise of the Federal Government!
Fiat money is paper money with no intrinsic value. It is not backed by gold or silver only by faith in the issuing authority. Government issues bonds which are accepted by banks as if it were a genuine tangible asset or an actual deposit. The holder of a Government bond believes he has a claim on a real asset when in fact there are more claims outstanding than real assets! Fiat money offers an easy short term solutions to Governments who spend more than they receive in taxes. Just print the money by issuing Government bonds.
The US Government has this year to issue $2.35 trillion as Treasuries bonds. China and Japan used to buy huge amounts of these bonds but of late they have reduced their purchases and the amount of Treasury bonds has increased by more than what these two and other countries can buy. The Federal Reserve has stepped in to buy these Treasuries! On 4 Nov 2010, the Federal Reserve has said it will buy an additional US$600 billion of Treasuries. Where did the Federal Reserve gets the money or assets to buy these Treasuries? Amazingly it is conjured out of thin air as Congress has given the Feds the power to create money out of nothing. This has created huge amounts of money and in order to maintain exchange rates equilibrium, other countries has also created fiat money to offset this huge increase from the US. The world is flooded with money which is one reason why assets are increasing in price from commodities like gold, silver, oil to properties.
This exploding US National Debt has serious ramifications on the world's economic stability and asset prices. Investments is not limited to a particular share or even how a country is run but globalisation means we have to understand how much fiat money Governments in USA, Europe, Japan and China are creating. Fiat money will eventually lead to massive inflation which devalues money and increases the cost of assets relative to paper currencies.
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A blog for investors where information and thoughts are shared with no hidden agenda, no products or service to sell, no offers of paid subscription. A place where individual investors can share their thoughts and protect themselves against Central Banks, hedge funds, greedy bankers and a host of parasites that feed on greed. Information is power but only when the information isin a useable form. I hope to provide useable insights for the small investors.
2 comments:
Unfortunately a reversion to the gold standard is simply not practicable. With respect, The Constant Thinker does not account the short term price volatility (i.e the rate of gold production) that such a reversion would bring. A look at spot gold prices is a clear enough indication.
Further, although long term price stability is the virtue of the gold standard, the total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit.
The Constant Thinker is a free market libertarian that does not see the need for government to pursuing fiscal policy to mitigate economic instability.
Can the constant thinker post his comments on Chinese companies listed on the SGX and such value propositions?
Seems like a good play given the yuan appreciation but I surmise one would have to beware of the "S-chips" and the fact that chinese finance is quite different. Given that most of such companies are partially state owned/controlled, shareholder interests are not necessarily considered a priority.
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