What would cause the failure of fiat money system?

[johnyj]

We all know that modern fiat money system is a scam, raise new debt to pay the old debt, forever increasing debt without escape

FED has created 5x more base money since 2008, it seems everything still works fine, and theoretically you don't have any limitation of possible debt that can be raised. Money is just some numbers, banks can always create it out of thin air

However, I still think this system has some hidden weakness, because from its root it is unsound (Creating value without inputting corresponding value). There could be many reasons that it still works, like people's ignorance or unawareness, but even majority are unaware of the truth, there might still be something that can cause a large scale failure of fiat money

Just to rule out some possibilities

1. Inflation is unlikely to be the cause
Inflation is low because with today's technology, the productivity can double every 1-2 years, much faster than the money creation speed. And most important, since banks control all the new money, those added money supply will never flow to goods/services included in CPI/PCE

2. Loss of interest/confidence of fiat money is also unlikely
In a low inflation or even deflation environment, everyone wants fiat money, the confidence of fiat money will be higher

3. Stock/Bond/Asset market crash is irrelevant
Now there are 5x more money out there in commercial banks, they can eliminate all the sell pressure at ease, and they already drive the bond price so high that the interest become negative

So there will be no crash of any kind, due to too much fiat money reserve at banks. However, I can think of two possible scenario that might cause trouble for fiat money

1. People's desire for fiat money start to fade
Fiat money's value depends on the fact that people want to get more and more fiat money to finance their higher and higher consumption. If the sentiment changed, the demand for fiat money is going down decades over decades (Due to higher productivity and less and less future demand, early retirement, etc...), then it is not possible to maintain its value and increase the aggregate income of the whole society. As a result, the national debt will just grow faster and faster (But since government can always borrow more and more, it does not necessary to cause a failure)

2. Some powerful entities (like international conglomerates) have been tired of playing fiat money game and being robbed by banks, they want to start a new monetary system in their favor

Is there anything else you can think of?

[BobK71]

Ironically, right now it looks like deflation (or lack of inflation) is the biggest threat to the fiat system.

Seven years after the financial crisis, interest rates are still stuck at zero, though the Fed would love to raise them.  That should tell us things are far from "normal."  The Fed and ECB actually walk a tight rope.  Too much stimulus and trust in currency (already threatened by the past debt) will be endangered.  Too little stimulus, or dismantling stimulus too fast, and the financial markets might implode again.  The governments, central banks, and banks can't simply create money at will (at least not outside the banana republics.)  That would be the quickest route to monetary meltdown.

So, if the authorities fail to get growth and inflation off the ground, they would have to peg currency back to gold, at a very high price of gold, to give themselves enough financial stability to enable much stronger stimulus (printing and borrowing money at a much faster rate than so far) in pursuit of growth and inflation.

The nature of the modern system is that (some) inflation is the stick that pushes savers to invest and consume, and drive the "virtuous" cycle of growth.  When savers bet inflation and growth are going nowhere (as they seem to be betting now) and sit on their money, the system is not sustainable since there'll be not enough growth to repay the debt that all that money started as.

[lockshop11]

1. Inflation is unlikely to be the cause
Inflation is low because with today's technology, the productivity can double every 1-2 years, much faster than the money creation speed. And most important, since banks control all the new money, those added money supply will never flow to goods/services included in CPI/PCE

We have a lot of fiat money history to see into the Future!Every fiat currency since the Romans first began the practice in the first century has ended in high inflation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
http://dailyreckoning.com/fiat-currency/

[coinsect]

There are a lot of factors, which will cause the failure of fiat money system, such as official corruption, war, and epidemic.

[V for Varoufakis]

The problem is that, the bankers are uneducated morons and they don't know how to print fiat, they dont know about macroeconomics, they dont know what is the Cambridge cash-balance theory and Cambridge equation and they dont know about keynesian economics.

[NUFCrichard]

It is all a confidence game, as soon as someone loses confidence, then the whole system could fall down.
Banks don't have much actual money available, bank runs are a failure of confidence, once a few people decide they want cash in their hands, then bank runs occur and the dominos fall.

I tend to think war will be the starting factor that brings it all down, everything is so interconnected now that Russia/China becoming more isolated from the West could mean but reductions in trade, reducing confidence in the sytems, leading to job losses and economic collapses.

[yayayo]

Just to rule out some possibilities

1. Inflation is unlikely to be the cause
Inflation is low because with today's technology, the productivity can double every 1-2 years, much faster than the money creation speed. And most important, since banks control all the new money, those added money supply will never flow to goods/services included in CPI/PCE

I can't agree with this point. Any proof for that? Real inflation is much higher than numbers reported by government (see shadowstats.com). Productivity doubling every 1-2 years?!? Where do got these numbers from? Have you ever visualized this growth function at all? Also, money creation speed can grow without any limits.

2. Loss of interest/confidence of fiat money is also unlikely
In a low inflation or even deflation environment, everyone wants fiat money, the confidence of fiat money will be higher

This rest on your first assumption (which I think is wrong).

3. Stock/Bond/Asset market crash is irrelevant
Now there are 5x more money out there in commercial banks, they can eliminate all the sell pressure at ease, and they already drive the bond price so high that the interest become negative

This is true: Other assets are not directly related to fiat money. They will be valued in whatever (inflated) form of money is available.

When it comes to fiat money failure, I think you have to distinguish between cause and trigger. The cause is the exponential growth of debt that is a deterministic property of the fiat money system. The trigger can be anything that makes enough people aware of it (failure to repay debts, increasing inflation).

ya.ya.yo!

[Slark]

The very nature of FIAT or every business in general is uncertainty.  Financial fragility of FIAT is always advertised as "stable", until it isn't.  When confidence changes, things change very fast.

If anyone knew for sure which way things will go, that person could make a lot of money. Even the final stage of a bubble this big could outlast a lifetime.

Or it could collapse tomorrow due to a seemingly insignificant event.

[mcplums]

I notice that no one has mentioned bitcoin yet in this thread?

It is very plausible that bitcoin could be the cause of fiat's downfall.

1) [insert country] decides to replace its USD reserves with bitcoin to reduce US hegemony (Russia & China have talked about getting rid of USD reserves for years)
2) $bns dumped onto the market, causing increased inflation and devaluation
3) $ now becomes a less attractive store of wealth. As a result, another country jumps ship and sells its $
4) Vicious circle starts of countries/individuals dropping their USD in exchange for bitcoin (or any other currency)
5) USD quickly becomes worthless
6) Fear spread that other fiat currencies will suffer the same fate
7) All fiat currencies become worthless

USD seems to be to be in a arguably more tenuous position than any fiat currency ever, in all of history, as there has never been a single currency held in such large quantities by so many foreign governments before. There are TRILLIONS of dollars that have been out of the game for years, which if released back into the market would cause so many problems.

[desired_username]

Informed citizens.

[mrhelpful]

Look at the zimbabwa money. $1,000 bills actually mean $1.00 or close to none.

The symbols are of zeros is going to run out on the piece of paper and you might as well wipe your butt with it. Fiat system alone is just a ticking time bomb, since the bankers dont really give a crap if it fails or not.

[Erdogan]

The error that will cause the failure of the fiat money system has already been done. We just have to wait to see it play out.

[Amph]

an alternative, would cause its collapse for sure, a better one i would say, but as long as one entity control the whole monetary system, it would be hard to think about collapsing

the current crisis seems to have put a dent on it, if we continue in this way, some fiat will collapse for sure, only the strong one will remain

[WhatTheGox]

Informed citizens.

Indeed, this will take some time though.  If we take the internet as an example still many people dont understand it as the #1 resource for information, rather a place to shop,talk,porn etc.

[NeuroticFish]

Informed citizens.

This is the best answer. Though utopic.

Informed citizen, smart citizen, will find out soon that (all!) the actual forms of government are not helpful to the society.
When this will happen, when a new and better form of government will be created, a new and better way of currency will be needed (compared to fiat).
And that new and better currency will have to be a decentralized electronic currency. Ta-dam!

[BobK71]

I don't think most people understand that paper currency is doomed to fail, long-term, by its very design.

Its critical flaw is that the power elites always have the incentives to create more currency and thus destabilize the very system they depend on for their power.

Power and exploitation by the elites have been around for millennia.  But power always sought stability.  (I.E. you might have murdered and plundered your way to the throne, but you always wanted peace under your rule.)  The modern monetary system, by contrast, is rat-eat-rat.

[hua_hui]

1. Inflation is unlikely to be the cause
Inflation is low because with today's technology, the productivity can double every 1-2 years, much faster than the money creation speed. And most important, since banks control all the new money, those added money supply will never flow to goods/services included in CPI/PCE

We have a lot of fiat money history to see into the Future!Every fiat currency since the Romans first began the practice in the first century has ended in high inflation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
http://dailyreckoning.com/fiat-currency/

It is impossible that the products and services are created continuously without considering the real demand! Cos it will lead to production surplus and break the balance of demand and supply. And the economy will fall to chaos. The banks are keen to lend out more money. The money will end up circulating in the economy!

[mrhelpful]

Its pretty basic, more people, more people needing money, eventually a longer doomed version scam collapsing overall. But, its not ending for a long time.

The problem is, the local government borrows from people, by issuing bonds etc. But, when they really go broke, by handing out to banks they leverage international ties with other international banks to get aided.

This cycle is never ending since its now invloving more then 1 international country, so not for awhile.

[thejaytiesto]

The fiat system has already failed with debts that will never be paid (no country will ever be able to face the debt). The system is being kept on a fake bubble by QE and never ending printing of fake money.

[Snorek]

The fiat system has already failed with debts that will never be paid (no country will ever be able to face the debt). The system is being kept on a fake bubble by QE and never ending printing of fake money.

As long as there is semblance of normality there is not much we can do about it. FIATs are here to stay, we need a revolution to get rid of that crooked financial system, it is grown too big.
I wouldn't say that money they prints are fake, after all you are able to use it and their value is quite stable over long period of time. Unlike bitcoin FIATS are not ultra volatile if managed right...