As a result, growth becomes the single most important driver of the fiat system. As currencies gradually lose value, due to declining purchasing power, people have to work longer hours to maintain their standard of living.
Stage 3 is the gambling stage where excessive liquidity makes its way into the stock market and real estate market. Growth will start to slow down and therefore, more money needs to be created to stimulate growth.
This means that interest rates must be maintained at artificially low levels. With interest rates kept low at the same time there's significant money printing, people will have to take risks on the stock market or real estate market just to keep up with inflation.
In stage 3, people also start to borrow more because of the wealth effect with the bubbles causing them to feel like they have more money than they do in terms of purchasing power. Stage 4 is the penultimate stage of the fiat cycle. Sluggish growth in western countries force financial institutes to try make money through other means than financing and brokerage fees. At this stage, corruption prevails, fundamentals are ignored and wealth is concentrated in the hands of a few.
At this point, individuals must look out for themselves by not trusting the government or financial advisors. Those who failed to do so would suffer potential loss of wealth in the latter part of Stage 4 and Stage 5. Stage 5 occurs when there is hyperinflation, which is the worst economic phase of the fiat cycle.
In stage 5, the currency becomes worthless. At this stage precious metals are often reoccurring in the monetary system to be used as currency or be used to back up the currency. Keep in mind that hyperinflation has occurred at least 56 times during the last two centuries. Throughout history, fiat currencies have had the order of rising and eventually collapsing, often due to devaluation.
Initially, paper money gets introduced into an economy whereby it creates an economic boom. Over time, however, it gets overprinted, slowly building inflation and losing value.
Eventually, it devalues enough to lead not only to its own collapse but also that of the economy connected to it. Later on, a new form of money is introduced to replace the failed one. While fiat currencies may stay around for a while, History shows us that they inevitably fail at some point.
Furthermore, other external factors can lead to the eventual collapse of a fiat currency. Before we continue on in this article, let us take a look at a couple of paragraphs from an article by Resource Investor , which sums up the situation nicely:. The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in , the British pound Sterling is the oldest fiat currency in existence.
At a ripe old age of years it must be considered a highly successful fiat currency. However, success is relative. In other words, the most successful long standing currency in existence has lost The Roman denarius provides one of the earliest and best examples of a fiat currency that rose and failed.
At the onset of the 1st Century A. By devaluing the silver content of the denarius, the emperors could simultaneously pay off their debts and become rich too. This idea caught on, and every succeeding emperor wanted to devalue the denarius to increase their wealth. By the time the Roman Empire was collapsing, the denarius contained 0. China first started using paper money in the 7th century.
At first, they used copper coins but made the switch to iron coins as there was a copper shortage. Unfortunately, iron was easy to find, and soon enough, iron coins were overproduced eventually leading to their collapse. In the 11th century, a Chinese bank situated in the Szechuan province of China suggested the use of paper as currency.
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