Topic: What would cause the failure of fiat money system? - page 2. (Read 1721 times)

Ironically, right now it looks like deflation (or lack of inflation) is the biggest threat to the fiat system.

Seven years after the financial crisis, interest rates are still stuck at zero, though the Fed would love to raise them.  That should tell us things are far from "normal."  The Fed and ECB actually walk a tight rope.  Too much stimulus and trust in currency (already threatened by the past debt) will be endangered.  Too little stimulus, or dismantling stimulus too fast, and the financial markets might implode again.  The governments, central banks, and banks can't simply create money at will (at least not outside the banana republics.)  That would be the quickest route to monetary meltdown.

So, if the authorities fail to get growth and inflation off the ground, they would have to peg currency back to gold, at a very high price of gold, to give themselves enough financial stability to enable much stronger stimulus (printing and borrowing money at a much faster rate than so far) in pursuit of growth and inflation.

The nature of the modern system is that (some) inflation is the stick that pushes savers to invest and consume, and drive the "virtuous" cycle of growth.  When savers bet inflation and growth are going nowhere (as they seem to be betting now) and sit on their money, the system is not sustainable since there'll be not enough growth to repay the debt that all that money started as.

We all know that modern fiat money system is a scam, raise new debt to pay the old debt, forever increasing debt without escape

FED has created 5x more base money since 2008, it seems everything still works fine, and theoretically you don't have any limitation of possible debt that can be raised. Money is just some numbers, banks can always create it out of thin air

However, I still think this system has some hidden weakness, because from its root it is unsound (Creating value without inputting corresponding value). There could be many reasons that it still works, like people's ignorance or unawareness, but even majority are unaware of the truth, there might still be something that can cause a large scale failure of fiat money

Just to rule out some possibilities

1. Inflation is unlikely to be the cause
Inflation is low because with today's technology, the productivity can double every 1-2 years, much faster than the money creation speed. And most important, since banks control all the new money, those added money supply will never flow to goods/services included in CPI/PCE

2. Loss of interest/confidence of fiat money is also unlikely
In a low inflation or even deflation environment, everyone wants fiat money, the confidence of fiat money will be higher

3. Stock/Bond/Asset market crash is irrelevant
Now there are 5x more money out there in commercial banks, they can eliminate all the sell pressure at ease, and they already drive the bond price so high that the interest become negative

So there will be no crash of any kind, due to too much fiat money reserve at banks. However, I can think of two possible scenario that might cause trouble for fiat money

1. People's desire for fiat money start to fade
Fiat money's value depends on the fact that people want to get more and more fiat money to finance their higher and higher consumption. If the sentiment changed, the demand for fiat money is going down decades over decades (Due to higher productivity and less and less future demand, early retirement, etc...), then it is not possible to maintain its value and increase the aggregate income of the whole society. As a result, the national debt will just grow faster and faster (But since government can always borrow more and more, it does not necessary to cause a failure)

2. Some powerful entities (like international conglomerates) have been tired of playing fiat money game and being robbed by banks, they want to start a new monetary system in their favor

Is there anything else you can think of?