Weathering the Storm

A hearty thanks to those who were able to attend our event Wednesday night: “How the Fed Creates Money…Out of Thin Air” on the Illinois State University campus.  My next few blogs will be dedicated to discussing the role of the Federal Reserve and answering some questions we could not get to last night.

Our first question addresses the cautions I raised about the future as the Fed continues to pump currency into the economy.  My comment was that a currency crash could happen very quickly and would probably wipe out the middle class.  Please keep in mind that I am not a qualified financial advisor and that these are strictly my personal opinions.  Always study enough to make your own decisions.

Historically, from the Ancient Roman denarius to the Zimbabwean dollar in 2008, fiat currencies have eventually become worthless.  They are either made less valuable by reducing the precious metal content or by increasing the quantity in the case of paper.  This allows governments to finance wars and social programs that would not be affordable through taxation.

Though the factors leading up to a crash may take decades, the crash itself is often swift.  Between WWI and WWII, for example, the German mark crashed virtually overnight and people found paper money worth more as fuel for their stoves than for purchases.  The middle class gets clobbered because they typically count on fiat money mechanisms to retire and save.  For example, those who save money find their life savings wiped out.  Those who are retired find prices so high that their fixed incomes are useless.  The poor may for a time have their needs met by the government.  The rich who see the crash coming will have moved their wealth into tangible assets that hold their value such as gold and silver.

What happens afterward?  Try as it might, government cannot force people to accept a certain currency once they believe it is worthless.  Sometimes a barter economy emerges, and sometimes the “real” money (gold and silver) that people had been hoarding comes back into circulation.  No matter what the particulars, it is utter chaos.  It is during these periods that tyrants often emerge, offering to “save” the people.  Watch for our government to make even more draconian laws as things get worse, all in the name of helping us.

How can we prepare?  In my view, there are two main ways.  One is to invest in gold and silver for the long term.  Those of us who have plenty of it should be OK because historically those have always been considered real money.  If a paper dollar is worthless, a silver dollar will come in handy.  The other way is to prepare yourself to earn a living with your own business.  No matter what else happens, people need to trade with each other.  Jobs may be non-existent.

Thanks for your questions–sorry we could not get to them Wednesday.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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