The internet generally consists of four things: news, memes, self-aggrandisation, and prophets of doom. And from what I can tell, the most vociferous prophets of doom are not religious. Instead, they’re frantic about the End of Fiat Money Days, the collapse of the Monetary system, and Financial Armageddon. So buy your gold, folks. And batten down them hatches.
Financial Armageddon: Real, or Conspiracy Theory?
So here are some things that almost everyone can (or should) agree on:
- ‘Financial Armageddon’ is almost a mathematical surety. In an infinite future, the probability of it happening tends to 1*.
*Of course, at the same time, our own existence is almost a mathematical impossibility – but let’s not focus on that.
- At some point in the future, we will no longer be using the current monetary system.
- One day, fiat money will no longer be in use.
That should not really be up for debate. Whether you’re a gold bug, or a conspiracy theorist, or an investment banker, or a Central banker, or anyone else: those are future virtual-facts.
How do we know this?
We know it because that is where the empirical evidence points. Our current monetary system of fiat money has been around for almost 50 years. Every monetary system that preceded it has disappeared. And even the current system is quite far evolved from where it was in the 70s.
Also, as far as I know, there is no institution or system that has endlessly endured unchanged. Here are the normal ‘oldest institutions’ contenders:
- The Papacy. The current Catholic magisterium is a far cry from the early Church, and a definite far cry from the enormous secular power that it wielded in the Middle Ages.
- The Imperial House of Japan. It was founded in 660 BC, and once wielded actual politic power – but today, the current emperor and his family are only Japanese ‘symbols’, with no political function (as enshrined in the Japanese Constitution).
- Kongō Gumi Ltd. This Japanese construction company opened its doors in 578 AD, and specialised in constructing Buddhist temples. After being forced into liquidation in 2006, today it is a wholly-owned subsidiary of the Takamatsu Construction Group.
The point is: even the institutions that have existed for millenia do not exist in their original form. They have had to evolve with the times.
Why should money be any different?
Once upon a time, we used gold sovereigns. Then we used paper notes convertible into gold. After that, it was paper notes convertible into US dollar notes convertible into gold. Then we used paper notes on their own. Then we began using electronic digits linked to debit cards, convertible into paper notes at our option. Today, we just use bits of data to record our relative wealth accumulation. And that’s only the last 200 years or so. Tomorrow, we’ll probably all use cryptocurrencies, backed by the infinite solutions to mathematical equations tied into public ledger systems. Thereafter, who knows?
Things change. The fiat money system will change. Tomorrow’s money is almost certainly going to be unrecognizable.
So given all that, the inevitability of monetary change isn’t really in question.
Why all the prophecy then?
Financial Armageddon: sudden and devastating
Most people expect change to happen. Sometimes, it’s a bit unexpected. Perhaps it happens sooner than you’d think, or it gets accelerated along by some new technology. And maybe it’s uncomfortable and/or frustrating. But for the most part, we don’t expect total devastation.
But for the financial prophets of doom, the change is always terrifying:
- Every currency will collapse.
- Anarchy and hyperinflation will reign.
- The tsunami of debt will crush everything in its path (except for gold and silver – those will be fine, apparently).
- Your bank account will be full of worthless numbers.
- People will starve.
Is this possible? Yes. But is it very likely? Well, I’m less sure about that.
Here is where you can find comfort about monetary collapses:
- Many populations, throughout recent history, have somehow managed to survive the collapse of their fiat currencies and monetary systems.
- The ‘collapse’ was never that sudden or unexpected. It happened over relatively long periods of time (ie. years, not days), even when the Central Bank in question was actively destroying the currency.
- To reiterate: even though those citizens were aware of what was happening to their currency and why, the ‘collapse’ was still not an overnight thing.
- Oddly, the more recent hyperinflation episodes were never accompanied by mad dashes for gold and silver bullion. Instead, the alternatives were foreign currency (the most popular), hard assets (like property and cars) and coupons for goods.
- And don’t forget that collapsing currencies are still usable! They can be used to pay taxes, and customs duties, and road tolls. Government revenue collection acts as a kind of a monetary anchor – because it means that there is always some demand for the collapsing currency to settle those bills.
So even if the worst happens, there will almost certainly be enough time to make plans and find alternatives.
But more importantly, on a global scale, here are all the people that have a vested interest in preventing the dramatic collapse of the monetary system:
- Practically everyone.
Other than anarchists, extremists, and naysayers, there’s not exactly a long list of people hoping for Financial Armageddon. And given that ‘fiat money’ requires all of us to believe that a currency is valuable and usable, everyone having a vested interest in that belief is helpful. More than helpful, if we’re honest.
So at least there’s that.
A Post Script
After I wrote this post, an economist friend (who I have huge respect for) rapped me over the digital knuckles for being glib about the reality of monetary collapse. In my defense: because I post so regularly, I often forget that people haven’t read everything I’ve written. Which gets me into trouble – especially where the post is a bit controversial. For background, please check out this post: “What is personal finance anyway?” – where I get very concerned about political and financial crises when it comes to retirement planning.
I’m not saying that we should just pretend that financial and political crises don’t happen, and that we don’t need to hedge against them. In fact, they’re almost certain to happen. But we can’t get hysterical about it, and see hyperinflation and war around every corner. We have to aim for cautious pragmatism instead.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.