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How the Paper Money Experiment Will End

by Philipp Bagus, Mises:

A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. In such a system with a constantly increasing money supply and, as a consequence, constantly increasing prices, it does not make much sense to save in cash to purchase assets later. A better strategy, given this senario, is to go into debt to purchase assets and pay back the debts later with a devalued currency. Moreover, it makes sense to purchase assets that can later be pledged as collateral to obtain further bank loans. A paper money system leads to excessive debt.

This is especially true of players that can expect that they will be bailed out with newly produced money such as big businesses, banks, and the government.

We are now in a situation that looks like a dead end for the paper money system. After the last cycle, governments have bailed out malinvestments in the private sector and boosted their public welfare spending. Deficits and debts skyrocketed.

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1 comment to How the Paper Money Experiment Will End

  • Ed_B

    “Deficits and debts skyrocketed.”

    That they have… and if this was REAL money, it would be quite a problem. Since it is not, then it is no big deal. The Fed and Gov conspire to create money out of nothing, which they are doing with abandon these days. But anything produced from thin air has the value of air, which isn’t much unless you are in a place where breathable air is scarce, for it is only through scarcity that air has much value.

    Just remember friends: fiat is for spending, and rather quickly at that, while gold and silver are for saving. Stick with this rule and you will be fine, financially. Add preps to this and you will have a good chance of being fine physically as well. 🙂

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