How do you understand today's dollar based money system?

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How do you understand today’s dollar based money system?

I can understand a monetary system in which the currency is backed up by some precious metal such as gold. If each dollar is backed up by x ounces of gold then I think the monetary system is quite straightforward and easy to understand. If at any time I am able to exchange a dollar for x ounces of gold I can feel comfortable with that currency. I can trust it. But our American dollar is a fiat currency and is not backed up by anything — not by gold, silver or anything else. The idea of fiat currencies bothers me. With a fiat currency a government can just print as much currency as it wishes. Where are the limits to which it can go? How can this kind of system work? Why not print enough money to pay everyone in the country a yearly income of $50,000 a year so no one has to work? We know that wouldn’t work. There wouldn’t be anyone to do all of the many kinds of jobs that need to be done in a society. No one would work and we would all starve. This fiat money system does allow a government to squander huge amounts of money on social programs and foolish projects that don’t work. More money can always be printed. If the system were a precious metal backed system the government could only spend the amount of money in the coffers. There would be limitations on what it could do.

At the time of the great financial crisis of 2007 - 2008 nations printed huge amounts of new money. Here in the US they called it “quantitative easing”. When our government prints dollars it does it only in a figurative sense. In actuality it simply transfers additional credits to the deposits of its member banks and they lend it out to customers and businesses at a profit.

Many, many governments have tried printing unbacked currency (as Germany after World War I or, more recently Zimbabwe) over the years and it has always ended in disaster — ending in hyperinflation with the currency becoming worthless. People lose confidence in the currency and don’t want it. They prefer some other currency that they trust. Fiat currencies certainly pose great risks. Risks of great financial disasters.

The US dollar is serving as the world reserve currency. I would say this system works because everyone in the world has a big interest in keeping the system working and they see no good substitute for the US dollar. The dollar appears to everyone to be the best of the options for where to put one’s cash. It is all about confidence and trust. They have more confidence in it than anything else. But what would happen if the rest of the world found some good replacement for the dollar as a reserve currency? As maybe some cryptocurrency? It is a privilege America holds because it is a dominate power. And as a result of its unique position in this regard it can get away with doing things no other country in the world would be able to do. Suppose America were to be overtaken by China as a dominate power?

A fiat money system rests totally on a foundation of confidence and trust. If trust disappears the currency can disintegrate causing great carnage.

A new monetary theory has come into fashion that is much talked about. It is called Modern Monetary Theory (MMT) and theorizes that governments with a fiat currency system can and should print (or create with a few keystrokes in today's digital age) as much money as they need. See Modern Monetary Theory (MMT): Definition, History, and Principles. The idea sounds really great. How very nice it would be if that would work. You could solve all of the world’s problems by doing that. You could supply everyone a basic income and erase poverty. My intuition tells me that the idea is like playing with fire in the vicinity of gasoline. It is just a temptation to try again what has been tried by many countries before. The question is just how far one can go in printing fiat money before everything crumbles and the country finds itself in an intractable financial nightmare. I don’t know what the limit is but I am certain there is one. We have gotten away with printing gigantic sums of money a couple of times (in the financial crisis of 2007-2008 and the coronavirus crisis of 2020-2022) without consequences. Because you have gotten away with it a couple of times doesn’t mean there is not great danger there. I am not so sure our government central banks are as capable of managing and manipulating currency problems as well as they may think. How does one manage a situation where a populace loses confidence in their currency and just doesn’t want to hold it (as happened with the German mark after World War I or Venezuela today) resulting in hyperinflation? See Hyperinflation in Venezuela. Money problems can be quite intractable. The great depression of the 1930's was a very intractable problem and caused great trauma for a huge number of people worldwide for a considerable amount of time. Once you get yourself into a big hole it can be very difficult to get out. Banks and businesses collapse one after another, domino style. Millions lose their jobs and without jobs people soon get hungry, desperate, and scratch in the dirt for food to eat. The columns of the great business/economic structure start collapsing one after another and the entire building soon collapses to the ground. Once it has collapsed it is very difficult to build it again. In the Great Depression of the 1930's financial dominoes didn’t just fall in the USA. Europe was hit hard. Large important banks of Germany and Austria became insolvent. The financial devastation that occurred in Germany was a direct cause of the rise of Hitler and Nazism. When people are hungry they will vote for radical change and radical people. See What would happen to the American economy if everyone started living in the simple frugal way that my wife and I do?

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“The largest bank in France froze its customers' money market accounts today. This thing [the Global Financial crisis contagion] is hitting Europe. Greece and Iceland are finished. Spain is teetering.”

- The Big Short

A single event can set off a chain reaction, what’s called “contagion” in finance.

It can come out of nowhere. One minute everything’s fine.

The next – everything’s engulfed in flames. Dominoes fall. Confidence collapses. Losses mount. No one knows what’s coming next. Institutions fail, and then more institutions halfway across the world might follow along. Confidence further shatters.

And so the cycle continues…

Twenty-four years ago, hedge fund Long-Term Capital Management (LTCM) sparked a financial panic and nearly a contagion.

Despite their esteemed staff, including Nobel Prize-winning economists, their leveraged trades were hours away from bringing down the entire global financial system.

Then, 14 years ago, the collapse of Bear Stearns and Lehman Brothers – once heralded institutions – did set off a financial contagion. When the smoke finally cleared from the Global Financial Crisis (GFC), the world’s economy had lost more than $2 TRILLION of value.

A seemingly vaunted staff, with all the right political connections. A heralded institution that can do no wrong.

Excerpted: sovereignman.com Take Control of Your Crypto Holdings… Before the Next Domino Falls and Losses Mount

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I can conceive that a hundred years from now the world might be speaking of some great historical worldwide money calamity that had occurred. It had lasted for years and millions had starved to death. It was caused by the ideas of the Modern Monetary Theory. A great worldwide money system collapse had occurred.

See also

YouTube End of the road: How money became worthless

YouTube The first modern financial crisis in the globalized world | DW Documentary

Putting all the Pieces Together

Government overspending

Our country has squandered trillions foolishly and it just keeps spending

YouTube Charlie Munger predicts a horrible economic crisis where everything will collapse

I think this last video is just filled with a tremendous amount of insight and wisdom — from beginning to end. Note what he says, about three quarters of the way through the video, about things being so much better now than they were just 200 years ago and yet people are more unhappy now than they were then. And note his diagnosis of the reason for this unhappiness: Envy. People are much better off in every way than they were then but are just very unhappy because they see that others have more than they do. This simple fact causes great unhappiness, misery and anger. I think this is very perceptive. I think Charlie is a very perceptive and intelligent fellow. I am impressed with him.

See: The angry, complaining, instigating, agitating, trouble-making liberal radical types who want to turn our system upside down

I hear liberal types talking about hunger in America. This kind of talk doesn’t impress me much at all as I know I could live on less than $1.00 a day if I wished to. And I would be eating healthy while I know that most Americans don’t eat healthy — and also eat much too much as evidenced by the fact that so many are overweight. See How cheaply can one eat? If you gave most Americans money for food they would squander it all on high priced packaged food, canned food, and junk food instead of economical basic foods such as rice, beans and potatoes. That is just how they are accustomed to eating and they would never be able to figure out how to eat economically. I also know what kinds of foods are given away to the poor in government food programs, as for example, what was in the free food boxes given out during the Covid crisis. They contained mostly relatively high priced boxed and canned type food rather than inexpensive wholesome staple type food. That is America and American mentality. One can use statistics to make very dishonest arguments. Suppose that one produced a statistic that said that the amount that the average American spent on food was $10.00 per day per person and then from that concluded that poor people didn’t make enough money to afford that and were thus underfed and thus to be pitied. Biased, dishonest people may make dishonest arguments. I live in a highly dishonest world and a main source of that dishonesty is liberal envy and envy-driven anger. I see a society filled with sham and foolishness. My wife and I know a Latin family who have long been giving us food. It is free food that they receive through some government food program — food that they don’t want. I am not one to let any food go to waste.

Also recommended:

YouTube Charlie Munger's advice on investing and life choices that make a person wealthy

YouTube Always keep learning and you will get a huge advantage Charlie Munger

21 Oct 2022