You're an employee and you’re grateful that you have a job. The problem is you get paid in government-printed cash that perpetually decrease in value.
Libertarian-leaning economists have a long-standing problem with fiat currency because it’s not backed by gold or other store of value. Look outside the U.S. to mismanaged economies like Zimbabwe, Venezuela and Greece. People are trapped inside borders where their money can become worthless in a short period of time.
If your fiat cash decrease in value by 1-2 percent annually, your loss in purchasing power may seem trivial. But consider how 1-2 percent adds up over 10 to 15 years and you're looking at a big loss in buying power. And unfortunately, inflation has a significant negative impact on savers and retirees who rely on low, fixed income.
Fiat currency lose value when a central bank or government creates physical or electronic cash by printing currency or by extending credit through fractional reserve lending. Both methods expand the money supply and debase the national currency.
The practice also leads to inflation. When more cash chase around the same quantity of goods, merchants charge higher prices for their goods and services because the cash used to exchange those goods are worth less.
How did old economic systems facilitate the trade of goods? In medieval Europe, popes and kings and their armies required payment in gold or silver or some other commodity that featured a tangible worth or use. Receiving a treasure chest full of monarchy-issued notes was considered too risky as a form of payment. Soldiers often demanded their wages in tangible goods such as land, silver or pillaged loot.
The word capital is derived from the term cattle because in the old days, wealth literally came from owning cattle. Not from holding paper notes that could become worthless if a kingdom is invaded or sacked.
The ancients fought over hard assets.
When bartering for goods or services, ancient traders exchanged commodity-money that were divisible and had intrinsic or practical value. Part of the reason why ancient Rome fell was because emperors debased the denarius by removing its silver contents. During the reign of Augustus Caesar the denarius comprised 95 percent silver. Nearly three centuries later, it contained just 0.5 percent silver. The empire's official coins lost so much value that Roman tax collectors refused to accept Roman coins and instead demanded tax payments in the form of physical goods like crop harvest and precious metals.
In North Africa, salt was a commonly-used medium of exchange. It was divisible, useful and universally-used by tribesmen as spice. Moreover, salt was easily transported by camel or horseback, which made it convenient to use as commodity-money. (The word salary is derived from the word salt.)
Commodity-money took many forms such as slaves, gold, silver, copper, bronze, cattle, cutting tools, weapons, sheep, wool, religious ornaments, precious stones and similar items. The Spaniards spent a fortune conquering South America for its gold and silver. (See colonial-era Potosi silver mines in Peru.) The conquistadors didn't cross the Atlantic to acquire fiat cash — they wanted real goods.
And in Asia in the mid-19th century, China fought the British in the Opium Wars. What history books don't teach is that the British were paying massive sums of silver to import Chinese tea. So they forced the Chinese to buy (and get addicted to) opium and demanded payment in silver bullion. This allowed the British to get back their precious silver. Large silver (and gold) holdings were key to maintaining the British Empire and its powerful navy.
Paper assets are risky
Government-issued fiat currencies are subject to risk by way of monetary-policy manipulation, as well as, general loss of confidence in the local economy that can negatively impact the national currency. This is a big reason why cryptocurrencies like bitcoin are rising in value as people look to preserve their wealth outside of devaluing fiat systems.
In today's headlines, the Venezuelan bolivar's crash is symptomatic of failed policies and monetary systems. The bolivar has become almost worthless since the late Hugo Chavez took power in 1999 and promised voters a "socialist paradise." The list goes on: Iran, Brazil, Argentina, Cuba, Greece, Zimbabwe.
Fractional reserve lending is inflationary, and it’s a controversial practice that diminishes people's wealth by decreasing the purchasing power of fiat currency. Central banks and governments are taking it a step further by printing cash — through what’s known as quantitative easing — which leads to the devaluation of the national cash.
Since 1913, the year when the Federal Reserve System was founded, the U.S. dollar has lost nearly 97 percent of its value. In World War 2, a Coca-Cola drink cost just 5 cents. Today you might spend a dollar buying Coke at a vending machine. Why the big price increase? Is it because Coca-Cola drastically reduced the supply of Coke? Of course not. You need more U.S. dollars to buy the same Coke product that your grandfather purchased for 5 cents in the 1940s. Just as in ancient Rome where citizens paid more in (devalued) denarius coins to purchase the same items in the local marketplace.
Alternative investments like gold and bitcoin are rising in value as people look to protect their savings and purchasing power. It’s a market signal that should hardly be ignored.