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| Fiat Bux! As devotees of
the Austrian School of Economics like to point out, money that is not
backed by real worth -- so-called "fiat currency" -- is always a
problem, and sooner of later a big one.*
Due to human (and politician) nature, mint-on-demand currencies not
backed by something of tangible value always end up overproduced and of
little worth. Since the US dollar went off the gold standard in the
Nixon era, currency conservatives would point out that disaster would
eventually ensue (as it has throughout history). As it turns out,
modern America should probably be congratulated for getting away
with fiat currency games for so long. But even great cleverness
eventually succumbs to monetary physics, and here in the early 21st
century, it looks like our bag of financial tricks is nearly empty. Doom and Gloom? Inquiring minds might say: "OK, Nostradamus, we went off the gold standard almost fifty years ago, and none of the Austrian doom and gloom came true, so why would it now?" Well, we truly have been able to 'cheat' the usual fate for an impressively-long time. This is due in part to economic tricks that kept pushing the day of reckoning into the future, but more importantly, to the dollar's status as the world reserve currency. If your "fiat bucks", though they are only paper backed by a promise to give you more paper, are nonetheless the Currency of the World, (and of oil and other markets), you apparently can defy the laws of financial physics. For a time. But the "reserve currency" thing is getting old and tattered, and -- again -- the bag of tricks is running close to empty. Plus, US finance has taken on more and more of an Alice in Wonderland quality, with much of the world's "wealth" tied up in trillions of dollars of derivatives (labeled "financial weapons of mass destruction" by Warren Buffet and others). These amount to mathematical forumlae atop mathematical formulae atop sliced and diced financial products whose value can be extremely opaque. Google "subprime crisis" for a synopsis of how investments in this kind of super snake-oil can pan out. So What to Do? Well, first realize that nobody knows, exactly. The future is, frustratingly, the future, and Cramer, Nostradamus, and your relative with the can't miss investment idea really do not know what is ahead. That said, you don't need a weatherman to tell you a financial storm is brewing. And when the smoke is thick and the BS knee-deep, common sense is generally the best defense. What does this suggest?
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