‘Next CRISIS will not be regional, but GLOBAL’: the Collapse of Fiat Money

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The world will inevitably plunge into a new crisis, while gold and silver will once again emerge as “real money,” says economist Claudio Grass.

Claudio Grass, an independent adviser on precious metals issues and ambassador of the Mises Institute, recalled the role paper money played before. But what Grass has to say, isn’t entirely on point. Nevertheless, his warning should be heeded.

“People today, especially in the West, have forgotten that paper money used to be used as a mere title to a certain amount of gold or silver. Nowadays, money is nothing more than a debt: it is the guarantee the next generation will pay the debt of the previous generation through taxes and inflation,” said the expert.

He cited Iran, Venezuela and Turkey, whose currencies fell sharply against the US dollar, as people started buying gold and other precious metals.

“The rise in the price of gold is a barometer that shows that the system is not working well. When the price of gold is rising, people on the streets understand that there is something wrong with the economy,” Grass said.

The expert also warned that the next crisis will not be regional, but global.

“I do not doubt that the next crisis will not be regional, but global. All markets, from bonds to stocks and real estate, are being manipulated to form a bubble,” he said.

Meanwhile, gold and silver, even as they lose some of their value in the face of the strengthening of the US dollar, will only serve as a basis for the next big market growth.

Grass points out that, as paper money loses its purchasing power and governments print more bills, few win but many lose. For him, the situation creates greater dissatisfaction among people, adding more pressure on fiduciary money (fiduciary currency is any title not backed by gold or silver and of no intrinsic value. Its value comes from the trust that people have in whom it issued the title).

Fiduciary money is only supported by trust and faith in institutions, which are now facing a historical crisis everywhere. I believe that fiduciary currencies and perhaps the current monetary system in general may eventually succumb to this pressure,” he said.

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While his particular point about the collapse of paper, that is fiat money may be true in some sense, a few things should also be noted. The Mises Institute is an ideological foundation committed to promoting a certain view of market-based economics, which in most instances reveal themselves to be normative, and not factual in nature.

Secondly, the issue of fiat, or paper money, reflects fractional reserve banking. The amount of available capital in numerical terms would decrease if fractional reserve banking were outlawed, and this would lead to a drying up of investment.

Under capitalism, if banks were limited in loaning out an amount not exceeding  the amount of actual gold and silver, or similar precious non-perishable commodities in the bank, or in stores, then capitalism under its modern iteration would cease as a system. At that point, only a government could, upon reintroducing ‘fiat by force’ (which exists anyhow today under ‘private’ corporatist conditions), push promissory notes as the basis of investment capital.

This is, however, the opposite of what the Mises Institute envisions as a solution.

There are three additional points to make in light of this. It seems unworkable within capitalism to eliminate fractional reserve banking, and create a 1 to 1 ratio of precious non-perishables in stock against printed cash in circulation. What is actually proposed is to ‘reign in’ the ratio which exists today. This ratio today is far beyond historic norms which at one point was 1:2, 1:10, 1:100, 1:1000. Today, that ratio far exceeds this. And there is a direct correlation between this, and inflation. But what the Mises institute wouldn’t recognize, for instance, is the role that upwards redistribution of wealth under capitalism has in creating inflation.

Secondly: a ratio exists at any given time, regardless of whether the cash on hand is nominally based in said non-perishables. In fact, that is the basis of the ‘petro-dollar’ – rather than being based simply in metals, it is based in the value of commodities in circulation, but chiefly that of gas and related marketable energy.

While the Mises Institute correctly sees that the next crash of the US dollar will create a ‘global’ crisis, ‘metal fundamentalism’ appeals psychologically to people politically, for similar reasons that people agree that silver and gold have an exchange value in the first place. It does not address the underlying point, better expressed in Keynesian and Marxian economic models.

Last, it is questionable if the collapse of the US dollar would create a global economic crisis outside of the US and its primary client states. The rise of the global south, BRICS, and that other countries are indeed buying gold and silver, building their reserves, along with the development of regional-based block-chain, i.e. ‘crypto-currencies’, will all work as a hedge against the collapse of the US petro dollar.

Countries buy US Treasury bonds do so not believing that they will ever be able to ‘cash in’ on these bonds. Rather they understand they are actually ‘propping up’ the US consumer economy, making a ‘cycle of production and distribution’ complete in their own productive, national economies. Buying treasury bonds amounts to a ‘pay to play’ system. This generates employment, stability, and ‘wealth in the margins’, in these national economies, by high-volume production with relatively low profit margins per unit, such as the Chinese model.

Financial planners in countries such as China understand this, and so they continue to work with the EU and US to avoid problems with their consumer economies. At the same time, China has increasingly oriented its economy towards suiting the needs of the ‘developing world’, such as Africa and Latin America. Here the ‘capital accumulation’ is more primitive, and therefore these economies exist somewhere ‘further back in time’ in terms of solvency and profitability.

 

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