Fiat
A reset is coming
This blog sets a primary purpose at its outset to learn from history and Be Prepared for history to rhyme in the future. A key part of financial history is the evolution of the currency system.
So no, this blog is not about Italian cars, it’s about fiat currency.
What is fiat currency? It means the currency (or money) we use to live our lives is not backed by any real or tangible value like gold. The fiat nature of Canadian and US dollars means their value relies solely on our individual and communal trust that federal governments won’t renege on their backing of our currency.
History teaches us that for thousands of years, at least back to early Egypt, people relied on real, tangible commodities – most often gold and silver – to improve trading. Eventually governments took over control of these commodities and began devaluing them from time to time by clipping or diluting coinage. After the printing press arrived, governments evolved to paper instead of coinage, but still backed by a real commodity. Finally, governments began to suspend the real commodity backing when they needed more currency than their commodity reserves would allow. The result is fiat currency.
Every fiat currency in the history of the world has eventually failed and been replaced. Literally all of them, 100%, no exceptions. There are dozens of books and videos that provide a more detailed description of this history. I can recommend a couple if you’d like.
Did you know that the Canadian dollar has been an un-backed fiat currency since 1933 (1), that its value is floating relative to the US dollar, and that the US dollar has been an un-backed fiat currency since 1971?
Given we know our fiat currency will fail, likely via failure & reset of the US fiat currency, here are a couple of good questions we should ask:
When? Smart money experts such as Keith Dicker on the Loonie Hour (2) suggest the failure and reset should have occurred in 2010 after the great financial crisis. Instead of allowing failure, the governments and central banks suspended reality by embarking on an unprecedented period of low interest rates and high levels of currency printing. Debts have skyrocketed, none more so than the US government. How long can this suspended reality continue? The time before a reset could be a month or a decade according to Dicker.
What will replace fiat? History suggests every time governments have abandoned backing, they then return to backing. Historically this has meant a return to gold, but today other options exist such as another commodity or group of commodities, possibly even Bitcoin or other real, tangible assets. The return may or not also include central bank digital currency (CBDC). Small countries are tinkering with many of these solutions already. No one knows the answer.
What does this mean for us?
The indeterminate timeline and unknown outcome make it difficult – but not impossible - to prepare. Knowing that the reset will probably include one or more of gold, other commodities, or maybe even Bitcoin, gives us the opportunity to own one or more of these assets as a hedge against the future.
The other more important work we can do is be aware of this coming change and listen for clues that could help us Be Prepared.
1. History of the Canadian Dollar, James Powell, 2006
2. Loonie Hour #156, October 2024