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You are here: Home / Finance / What Is Fiat Currency? And How Does It Affect You?
What Is Fiat Currency? And How Does It Affect You?

What Is Fiat Currency? And How Does It Affect You?

August 20, 2020 By Cade Hildreth Leave a Comment

Fiat currency is paper money created by government decree that is not backed by a physical asset with intrinsic value. As of 2020, there are approximately 180 fiat currencies worldwide.

Examples of fiat currencies are the U.S. dollar, the European Euro, and Japanese Yen, among many others.

To understand how fiat currencies work, let’s look at one specific example, the U.S. dollar. Of course, thanks to globalization, the same system that applies to the U.S. dollar now applies to fiat currencies worldwide. 

The U.S. Dollar, a Fiat Currency

The U.S. dollar was taken off the gold standard in 1971 by President Richard Nixon (also called “Tricky Dick”). By going “off the gold standard,” I mean the United States government no longer had the responsibility to convert dollars to gold at a fixed amount.

Since that time, our money has not had any physical value—it is just cotton and linen.

The only value that our dollar has is that which the U.S. government states it has and that which we, the people, believe it to have. Also, no fiat currency has survived in all of history. So, you know, that’s concerning.

Fiat Money = Any paper money created by government decree.

Practically speaking, taking the U.S. dollar off the gold standard has had several concerning effects. I’ll share a few concrete examples with you below.

Derivatives, Financial Weapons of Mass Destruction

First, taking the U.S. dollar off the gold standard has allowed a wide range of financial instruments to be introduced.

Financial instruments that benefit the creators, but in many cases, not the investors. A derivative is a financial instrument that is valued based on an underlying asset or package of assets.

It is separated from the assets, like orange juice separated from an orange.

Sometimes, financial groups even do derivatives of derivatives, which would be like squeezing an orange to create orange juice (the first derivative) and then concentrating that orange juice (the second derivative).

Why would the financial industry do this?

Because by packaging things together, low value items can be combined with higher value items and then re-sold to people who probably don’t have a clear understanding of what they are buying. Commonly, the people who are selling derivatives receive incentives to do so. Pretty tidy, right?

This is exactly what happened when unregulated derivatives that played a major role in the 2008 financial crisis—a period known as the “Great Recession.”

Until COVID-19 hit in early 2020, the Great Recession had been the most significant economic downturn in the U.S. since the Great Depression. Yikes, right?

The primary driver of this recession was deregulation of the financial industry, because it allowed banks to engage in the unregulated trading of derivatives. When economic events caused the values of derivatives to plummet, banks stopped lending to each other and the Great Recession ensued.

During this time, an estimated 7.3 million Americans couldn’t pay their mortgages and had their houses go into foreclosure. Another 1.9 million short sales occurred as well, meaning, the purchase prices of these houses were less than what was owed on the mortgage.

Now you know why renowned investing genius, Warren Buffett, called derivatives “financial weapons of mass destruction.”

The Fractional Reserve System

Another powerful example of why fiat (paper) currencies like the U.S. dollar are risky is the Fractional Reserve System.

Based on this system when you put $100 in the bank, the bank is allowed to lend out $90 of it. If the people/businesses who receive the $90 place them into a bank, then $81 can be lent out (90% of the $90). Next $72.9 can be lent out (90% of $81). And so on. It is estimated that this system allows one dollar to be lent out up to 100 different times.

This means that a single dollar can rapidly multiply, creating “ghost” copies of itself.

U.S. dollar inflation

The Federal Reserve, America’s Central Bank

Perhaps most concerning, our government can now create money—for example, to fund a $2.2. trillion COVID-19 stimulus package—by adding digits on a computer screen.

This has the same effect as pressing new metallic coins and printing new bills, only it’s dramatically cheaper because no printing presses are required.

Most money today is not printed. It is digitally created currency.

Of course, the Federal Reserve (“Fed”) can also combine digitally created dollars with the Fractional Reserve System to really amplify the money supply.

For example, the Fed could print $10 billion in new paper bills and add an another $90 billion in digits (to readily liquifiable accounts). This would create a monetary influx totaling $100 billion.

Almost all of that $100 billion will enter the banking system, which means it will nearly immediately get lent out to governments, people and businesses.

Because banks are only mandated to have 10% of that money in reserves, they could lend out $900 billion, creating a total monetary influx of $1 trillion—that’s $1,000,000,000,000.00.

Pretty wild, right?

Why Should You Care About Fiat Currency?

Practically speaking, what does this mean for you? It means that if the Federal Reserve deems it necessary, a frightening amount of new money could enter circulation, dramatically driving down the value of your existing dollars. 

Within the U.S., the average inflation rate is 3.22% per year. And that’s when it’s controlled and things are working right.

If you’re making the average stock market return of only 10%, this also means that you are officially losing one-third of your investment to inflation.

Whoa, right?

If this doesn’t inspire you to learn how to invest and aim to achieve returns of 10% or greater, then I don’t know what will.

What questions do you have about the U.S. dollar and what you should do with your savings, given these risky realities? Ask them in the comments below.

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“As an LGBTQ+ entrepreneur, real estate investor, former USA Rugby Player, and fitness fanatic, I’ll teach you what your parents and teachers should’ve taught you, but didn’t know themselves.” -Cade Hildreth

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Or, listen to Cade’s articles on the go as a Podcast.

Because it’s the New Year, let’s talk about ch Because it’s the New Year, let’s talk about change...

For a long time, I’ve thought about top surgery. I remember when I was 6 or 7 years old when I wanted to run around outside on a hot, sunny day with my shirt off…and I first saw my parents… hesitate. Ughh. 

It wasn’t their fault but I still remember that heart wrenching feeling. To their credit, they ultimately said, “Ok, go do it!” While I did “do it”, I remember the feeling of shame that crept in.

Over the years, being in affirming sporting/rugby circles helped suppress the urge to get top surgery, but it never quite “stayed down.”

So last summer I got keyhole #topsurgery. I’ll talk about recovery in another post because it was definitely weird to not strength train for months.

But in THIS post, I want to share two things:

1. I am SO grateful to my wife Erin for being the supportive and growth oriented partner that she is. 🥰🙏❤️ 

She is now following her call to get a divinity degree and she’s already working in ministry as a Pastor in Training at an incredible, inclusive Presbyterian church here in Virginia. I am grateful to her for supporting me as I become more and more of who I am—and I’m enjoying watching her do the same! Love you, babe!

2. Second, I’m grateful to get to share who I am with my family. This summer we took a trip to Madden’s resort in MN to celebrate my parent’s 50th wedding anniversary. (It was actually their 52nd, because we had to postpone it twice due to Covid.)

I was nervous to be in the pools and lakes around them, but I could feel it was my only choice because I knew I wanted them to “know me”. And, how could that happen if I “hid me”?

Ultimately, I have to tell you…it was freeing to be me, as I am, who I am. 

I had the BEST time splashing around and biking and goofing around with my wife, niece, nephew, & sister. 🌊🏖🐟

So, I suppose, this is a gratitude post to thank those who have supported me over the years as I become more and more of who I am. 

Top of that list is my wife, Erin, but there are countless others. ❤️

If you’re reading this, thank YOU for being one of those people in my life too. I am deeply grateful. 🥹
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1. Good and bad are labels. All things are experiences. 

2. Maturity is taking full responsibility for oneself. 

3. Having a loving, conscious relationship with myself is a core value. 

4. Emotions do not mean that anything has to be done. 

5. When I am in congruence with what I want, I have it. 

6. I have permission from myself to stop doing anything that doesn’t lead to my peace and empowerment. 

7. Stepping toward emotions and being able to feel them is a superpower. It determines the quality of my life. 

(Are there any above that you’d like me to further explain?)
 
Most importantly, which # above resonates with you? ⬆️

Happy New Year, y’all! 🎊🥳
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Interview with Jenny Nguyen, Founder of the Sports Interview with Jenny Nguyen, Founder of the Sports Bra—The World's 1st Bar to Only Play Women's Sports - shorturl.at/doGHZ

I'm excited to introduce you to today's #podcast guest, Jenny Nguyen, who is a professional chef, elite athlete, and entrepreneur.

I invited Jenny onto the podcast because she has done something extraordinary that is long overdue: She has opened up a sports bar that exclusively plays women's sports!

Despite extensive research, Jenny hasn't found another sports bar worldwide that ONLY plays women’s sports.

Given that it's nearly 2023, this is mind-blowing. As a lifelong athlete, I find her vision compelling and inspiring.

Aptly called the "The Sports Bra", the venue is putting Jenny's culinary skills on display alongside women's sports worldwide.

The Sports Bar has taken its mission a even further by partnering with and elevating other local, women-owned businesses.

Specifically, it:

1. Sources its grass-fed beef from @CarmanRanch, an ranch run by Cory Carman, a third gen rancher out of Wallowa, Oregon).

2. Sources its alcohol from Freeland Spirits, an all-women owned and operated distillery out of NW Portland.

3. Has furniture built by @girlsbuild_org, a non-profit organization headed by @ktmhughes in Portland, OR, that teaches carpentry and construction skills to young girls as a path to empowerment.

Since opening the Sports Bra this April, people have come from ALL over the U.S. and the world to experience it—including many professional female athletes.

To learn more about Jenny as she makes history, features women's sports, and elevates women-run businesses, listen to the episode here:

shorturl.at/doGHZ

Or, you can check out the Sports Bra at:

@thesportsbrapdx
TheSportsBraPDX.com/

Have you heard of the Sports Bra or been out to experience it in person?

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Over this recent holiday stretch, we… - enjoye Over this recent holiday stretch, we… 

- enjoyed some quiet time at home
- got a sauna delivered (but not yet installed)
- decorated for the holidays
- baked a bunch
- visited our favorite farm
- did some sight seeing
- and perhaps, most importantly, survived the cold snap along with our feather friends (who lived in the garage for a few days so we could heat them with a space heater) 🥶🐔

How have the holidays treated you…and did you get hit by the winter storms? ❤️🎁☃️❄️
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