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Wednesday, December 3, 2008

Airelon's Thoughts Regarding Fiat Currency ...

"The main problem that arises on the fiat system is that of human nature" - Myself

On Thursday, October 9th I had a blog entry regarding "Airelon's Thoughts Regarding the Gold Standard".

Since that time? I've received so many comments, emails and private messages, that I've almost forced myself into defending the fiat currency system.

Which I don't want to do. Not at all. Anyone who has listened to my thoughts for any length of time, knows that I do not want to advocate, or defend any economic school of thought, nor do I want to defend any one system. I just try to point to 'what is'. To determine 'what is', I have to know each theory accurately. I have to know the drawbacks and the advantages. Thus, I can walk into any trade, better informed. Any investment, better informed.

And the fact of the matter is that there are very real problems with the fiat currency system.

So what are my problems and thoughts with the fiat system? Is the trend change we've seen on the US Dollar based on deleveraging? Or mob psychology? We discuss that in the following vlog ...

(Video Included. If you're seeing this from Email subscription? Click on the Title Link in the Email to View the Video ...)

So basically? In as few points as possible, why hasn't the U.S. Dollar devalued with the increase in money supply?

1) De-leveraging: People exiting their equity and over-leveraged derivative positions. When they exit those positions? They need a currency. That massive rush has been to the U.S. Dollar. That also leads to point number two ...

2) The Fed gave money to the banks at a very reasonable rate: But the Banks 'hoarded' that money. They didn't loan out money to others at a slightly higher rate. They just stopped loaning. Basically, it's supply and demand. The supply increased? Yes. But the demand rose, and the actual supply? Never made it's way to the consumer. It went as far as the banks, and stopped there. Some of that has simply disappeared to balancing ( de-leveraging ) over-leveraged derivative positions.

3) Macro-economic liquidity: People need a liquid means of exchange on a day to day basis. This goes to the Lucas Critique that I mentioned in the video. Everything starts with what is most sagacious and practical for your average guy on the street exchange money he or she earned from his labour for goods he or she wishes to purchase. This also relates to the psychology of the entire economy.

4) No crisis of confidence: Due to the above factors? People have watched the U.S. Dollar soar to new heights. Higher than it's been since April of 2006.

5) Wages have not increased: Instead, unemployment has increased. Therefore, producers will not receive more money from the consumer. Therefore, the producers begin to lower their prices. Economics 101. Thus, the fall in prices we've all witnessed among the commodities.

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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