5/14/2009 PERMALINK
The king has no clothes recognition avoidance mechanism Politicos and government economists love the concept of fiat money. It gives them more power. But fiat money is only the latest in a long line of currency debasement scheme sovereigns have practiced since money was invented. All such schemes have ended badly and so will the fiat money/credit bubble expansion economic model of today. Fiat money prosperity is just an illusion of prosperity. Only money with a stable intrinsic value can foster a healthy enough savings rate for the formation of a resilient prosperity. So when will the piper have to be paid?

The dollar is unique in that normally a king's enemies can win by the collapse of a king's currency debasement scheme. But with the dollar, a collapse would see no winners anywhere in the world, since all nations have followed the dollar into the fiat currency model. When the dollar does, their fiat money goes too, creating a financial catastrophe unprecedented in its scope. The magnitude of the catastrophe and the universality of the risk creates a unique economic support mechanism like the one between courtiers and king in the children's tale.

The king has no clothes recognition aversion factor creates in all who have their livelihoods staked on the continuation of a particular system. An extremely powerful psychological aversion blocking their ability to perceive that the system on which they are so utterly dependent is fundamentally and fatally flawed.

A corollary to the king has no clothes recognition aversion factor is that when reality finally forces an end to the collective delusion, the collapse will be unprecedented in its magnitude.

Any financial instrument denominated in any fiat currency is likely to become worthless as markets seize up and fail to settle worldwide. Real estate not usable for affordable housing or agriculture is also likely to have negligible value. Only items like food that people have an immediate need for can be relied on to hold their value in trading power.