Monetary Systems for Dummies

Most people, no matter what their background, find the subject of monetary systems somewhat intimidating. Certainly there are huge complexities and nebulous concepts in this field of discussion

Monetary Systems for Dummies

Monetary policy is not a science, it involves a great deal of hope, faith and estimates. Good timing is critical as monetary flows are unpredictable.
 
The basics though are as follows.  Money (fiat currency created by governments or banks) is not real wealth, it is a claim on real wealth.  Printing money does not create wealth, it creates greater demand for the real wealth that exists.  Hence, when banks print money to increase liquidity in the economy (stimulate) a great deal of it ends up in the stock market or real estate market, forcing prices higher but creating no real wealth.  This is called "asset inflation".

The American government used to call it "the wealth effect" and the Canadian government currently calls it "asset enhancement".   Different terms for the same bubble blowing policy.  In reality it is currency debasement and this has been at the root of financial collapses since the first fiat currency was created thousands of years ago.

Most people, no matter what their background, find the subject of monetary systems somewhat intimidating. Certainly there are huge complexities and nebulous concepts in this field of discussion.


However, understanding what a monetary system should be is considerably easier than understanding monetary systems as they currently exist. It would appear that, based on humanity’s 1000 year experience, monetary systems based on fiat currency, (created and arbitrarily valued by the governments) are inherently unstable and guaranteed to fail at some point.
 
In fact, the longer they continue, the less robust they become until some event, large or small, occurs which is just sufficiently destabilizing to bring the system into crisis.
 
There have been 68 internal (within a country) financial crises and 250 sovereign (international) crises plus hundreds of banking defaults since 1800. Modern financial guidelines have not reduced their frequency or severity.
 
The basic problems leading to collapse, insolvency, default and crisis are the amount of money printed relative to the real asset base and the rate at which that printed money can be converted to other assets. If it can’t be converted quickly enough (the bank can’t pay on demand) then confidence evaporates and the system begins to fail.
 
The ideal monetary system will operate in lockstep with the asset base and the real wealth creation process. It will be based on a currency whose value is universally and clearly understood, will not change over time and whose liquidity will always meet expectations.
 
The most important thing to understand about our current fiat (baseless) monetary system is that it does not meet those criteria and no matter how sophisticated the controls implemented, never will.