Paper money today is fiat money. Since 1971, real assets have not backed the dollars that Americans spend. Paper dollars have value by government decree: The government has declared these printed dollars to be legal money.

Due to the strong economic history of the United States, the dollar continues to have perceived value in the United States and around the world. However, that strong story is receding both in time and in reality. For many reasons, fiat dollars are worth less and less, and by the time people realize this, it may be too late to do anything about it.

A brief history of fiat money

The official currency in ancient Rome was the denarius. In AD 50 the denarius was a pure silver coin, the emperors gradually reduced the silver content until the denarius contained less than 0.05% silver. When Rome collapsed, the denarius was unacceptable in exchange for goods and services. China used worthless paper as currency around the 11th century AD

The currency held its value as China expanded its empire, population, and trade surplus. When these declined, the supply of foreign exchange continued to rise, quickly destroying the economy and peace.

In France, an attempt to issue coin-backed paper ended after excessive increases in the money supply and people were unable to exchange their now worthless paper notes for coins. In a more recent attempt, the inflated paper franc lost 99% of its value in 12 years. The post-World War I Weimar German Republic was saddled with severe reparations from its part in World War I. He printed increasingly useless paper money to pay off his debt.

Why fiat money always decreases to zero value
No government has ever been able to discipline its monetary policy. History has shown that fiat currency makes it easy for any government…

• increase the money supply through borrowing
• increase the money supply simply by printing,
• increase spending – particularly damaging deficit spending,
• attach onerous regulations to the money you spend, and
• expand their control over society and business.

Some reasons (called emergencies but really excuses) for these dangerous economic decisions are:

• financing a war
• in the face of a natural disaster,
• respond to a shortage of an energy or food product,
• the widespread greed of government officials to gain additional money, power and influence,
• an economic downturn, including a cyclical downturn, and
• an economic crisis, like the one in 2008, which threatened the entire monetary system.

Some of the consequences of unruly government actions with fiat money have been:

• a growing national debt with its interest burden,
• difficulty finding organizations or nations to buy the growing debt,
• inflation, or even hyperinflation,
• the decrease in the purchasing power of savings,
• declines in consumer confidence,
• a move to exchange fiat currency for assets that have real value, such as gold or property,
• an increasing reliance on government payments,
• less room for businesses to profit and grow as government activity expands,
• a decreasing tax base,
• the government does not meet its obligations, such as pensions or rights,
• civil unrest and ultimately
• a change of government or monetary system.

The US move towards fiat money

Until the Great Depression, the United States was based on the gold standard, and dollar bills could be exchanged for gold. In 1933, the dollar devalued, but it was still backed by gold. With this gold backing and a strong economy, the US dollar was accepted as the world’s reserve currency after World War II.

The economies of most of the countries involved in World War II were in shambles. However, deficit spending during the Vietnam War caused nations to redeem their weakened dollars. With the US gold supply increasingly depleted, President Nixon ended gold backing of the dollar in 1971.

President Nixon’s action turned the US dollar into fiat money that is worthless and is not backed by assets of real value. At the same time, all world currencies that had been pegged to the US dollar since 1945 also became fiat money.

However, in 2010, because the US economy has remained relatively strong, the dollar remains the world’s primary reserve currency. Global commodity prices, such as oil and gold, are quoted in US dollars. While the euro had strengthened to become an alternative reserve currency, recent troubles in several European economies caused many to sell euros and buy US dollars along with gold and other real assets. The situation in Europe has stabilized for the moment and the euro is rising again.

The growing weakness of the US economy

However, the key position of the dollar in the world economy is increasingly being questioned. There are good reasons to question the value and strength of the dollar. The US government is guilty of every action that renders fiat money worthless, and the US economy has experienced almost all of the consequences listed above. Current policy is only increasing these effects and putting the US economy at greater risk. Some current and very serious dangers facing the US economy are:

1. Continuity of deficit spending. Since the 2008 economic crisis, US budget deficits have tripled and are expected to remain above $1 trillion for many years.
2. Increase in the money supply. There are more dollars and fewer purchases in a recession; there are too many US dollars and their value is necessarily plummeting. Many of these additional dollars actually belong to countries that buy our debt, like China and Japan. Possibly other dollars are simply being printed, such an addition to the offer would immediately devalue our money.
3. Increased national debt: Since the 2008 economic crisis, the national debt has grown by more than 3 trillion, more than 30% in 2 years. Unsustainable, but no leveling in sight.
4. Higher Interest Rates: Since interest rates have been at all-time lows, the cost of borrowing that much money has been relatively low. Higher interest rates could make a broken budget unfixable.
5. Rights and pension commitments. The long-term bonds of the US economy are now well over $100 trillion. It’s impossible to find that much extra money with $4 billion of deficit spending every day. This is also untenable.
6. Inflation. Dollars won’t buy as much. Cash-strapped consumers would have to further reduce their spending. And businesses that need customers will face higher costs and need to raise prices while attracting customers who need lower prices. Inflation will weaken both the US dollar and the US economy.
7. Flight from the US More companies and dollars are leaving an increasingly hostile business and tax environment for friendlier hosts. This further weakens the US economy.

These risks could spiral down and get dramatically worse. In addition, other dangers that the US economy may face are:

1. Countries that sell dollars. Many countries have held dollars in reserve and many countries have bought parts of the 13 trillion dollar debt. How much weakness in the dollar or in the US economy will trigger a dollar sell-off?
2. Serious terrorist attacks. God forbid this happens, but such an event will create a fear that could trigger drastic “emergency” actions, such as selling currencies for gold and other assets. This could destroy the fragile US dollar or other fragile currencies and economies.
3. Default of another national currency. This would have a negative impact on international credit, trade and corporations, again creating fear and putting additional pressure on the US economy.

Greece almost defaulted on its obligations, a situation that had the whole of Europe struggling. Fears that failure to comply could bring down the precarious economies of Portugal, Spain and Ireland prompted the world to lend Greece money and give it time to correct its problems.

How long? More debt for Greece is an additional burden in the long run. Will he be able to solve his problems in the midst of violent riots? What about other countries on the brink of disaster? What can (almost) be the next default? If these smaller economies fall, the larger economies of France, England and Germany will also be at serious risk.

Global impact if the fiat dollar loses its value

The world economies are connected and many will fall if the US dollar loses its value. Countries that have US dollars in reserve will be weakened. Even if some creditor nations with vibrant economies can maintain the value of their currencies, the impact of the dollar’s decline will be severe.

The world needs the United States to be strong and buy its products. For example, China can withstand the loss of its US dollars and debt, but if the US cannot afford to buy its products, it will at best close down a large number of Chinese factories and companies.

It does not matter if the fall of the US dollar precipitates the global economic collapse or if the collapse begins in other parts of the world. Many national economies are on the brink of default or collapse and could fall rapidly. Yet in the face of these concerns, governments still appear to be lending and spending, mounting debt and deficits, the very actions that have brought the world to the brink.