Monday, April 2, 2012

Understanding Fiat Money

The following video provides an excellent visual demonstration of how a "fiat" money system functions.  A fiat system means that money is borrowed into existence at an unlimited rate.  Or another way to put it is that money's value is based on the government's ability to tax its citizens in the future, which implies the money's value is based on the credibility of the government itself (a topic we have found out recently is very important).

Part of the video discusses the importance of who receives access to the money first in a fiat system.  The reason this is so important is that by the time money has made its way through the system, otherwise know as "trickling down," it has already been diluted.

There are those that argue that the reason we cannot have a hyperinflationary environment in this country is because the people who have the power would be negatively impacted just as much as the everyday person.  By moving through the video demonstration below you see that this is not the case.  The government, banks, large corporations, and government contractors get the money first and then it is spent into the economy allowing access from "the rest of us."  This simple concept shows that should a highly inflationary environment occur, those at the top will have the ability to protect themselves, and even profit, before the negative consequences of our fiat system are absorbed by the masses.

Instead of getting angry at the system itself, which will not be changed as the benefactors just discussed that receive the money first are those that provide the money for politicians to become elected, I would recommend learning how this financial system can benefit you personally.  There will be those that are winners and losers moving forward beyond just the banks and government contractors, and I'm not just talking about those that invest in gold.  I'm talking about those that understand the power of debt and can wield it to their advantage to create assets.

If you understand that money is borrowed into existence, it opens your mind to the way the wealthy think about the world.  It is also important that the masses do not understand how this process works, which is why it is never discussed in public schooling.  If the 20% of underwater homeowners in this country understood that the money they borrowed to purchase their home was created out of thin air right at the closing table when they signed the documents, instead of money they were borrowing from some older man who has saved his whole life and was nice enough open a bank to lend them the money, what are the odds they would continue to make their mortgage payment on an underwater home?

The same happens when an American visits the store and swipes their credit card.  The money is not being lent to them from a company who has it stored in a vault somewhere that is nice enough to lend it out. The money is being created right there at the check out line when the card is swiped. Once again, if Americans knew this, how much more likely would they be to work day after day killing themselves to repay that debt with 15% interest?

I do not spend my business hours working for money. I spend my working days learning how to build a business (by building a business) and learning how to invest in real estate (by learning how to purchase, finance, and manage commercial properties) because those are the two vehicles that the "average" person in this country can use to borrow debt.  Do you know any other reason why a bank (or investor) would lend you money?  Think about it for a moment.

Central banks around the world print money today by adding zero's to a computer screen.  Do you think the average person can keep pace with them by working hard and saving money? You must have the ability to "create money" which is done in a fiat system by borrowing money into existence.

This discussion sounds insane to most people, but its importance is immeasurable.  Can you work and save money faster than the Fed can print it?  If you do not think you can, then I recommend spending some time researching and studying to find a way to achieve leverage.



If video above is not working, please try one below:

3 comments:

  1. Hi! The link to the video is broken. Do you have another link? Thanks!

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    Replies
    1. Just updated with a new one, sorry for the delay.

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  2. Hi Tuna,

    Great post - as always. I make it a point to visit your site every day for your nice analysis!

    Thanks for all the great articles.

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