Following on from my article:

A Summary of the Statistical Lies and How they Paint a False Picture
http://neuralnetwriter.cylo42.com/node/430

I'd now like to address the bigger picture.

The history of money stretches back over centuries. One aspect that stands out is that each nation tends to start with a sound money system which gradually mutates into an unsound money system. The unsound money systems, have a short lifetime. The unsound money is that which has no inherent value, and is only used because the government dictates that it must be used. That money is called fiat money.

Every country of the world is currently using fiat money.

What are the characteristics of fiat money?

1. They have no inherent value. They are just pieces of paper or base metal coins whose value is a mere fraction of their face 'value'.

2. The quantity of fiat money is not restricted. Any quantity can be created at the will of the government.

3. When people borrow money, the total quantity of money in the system increases.

4. Interest is charged on borrowed money. The only way that interest can be repaid is if the total amount of money in the system grows at the same rate as the interest rate.

There is a subtle balance required between the rate at which the amount of money increases and the rate at which the productive economy grows.
If the growth of money is too great, the purchasing power of that money will decrease, because more money will be chasing a relatively smaller amount of goods and services.
If the growth of money is lower than the growth of the economy, the purchasing power of the money will increase and everyone will be more wealthy. This is the ideal situation.
It is important that the newly created money is used to grow the real productive economy (referring back to my apple producing island in the last article). If money is created as part of an asset price bubble, like the tech. stock bubble, housing bubble etc, then that newly created money will not be balanced by real economic growth, and the purchasing power of all money will decrease.

What is the typical life-cycle of a fiat currency?

1. It comes into existence to solve some economic problem, like expenditure on war, or to get out of a recession/depression.

2. The amount of money increases at a greater rate than the real economy, so the fiat currency loses purchasing power. This is probably because the interest rates are on average greater than the average economic growth rate.

3. As the amount of money grows, instability grows, as that money creates more and bigger bubbles. Borrowers are forced to look for ever greater profit in order to repay their growing debts. We know debts must be increasing because it is debt that created the money. And the money does not all go into productive investment because the economy is not growing fast enough for big enough profits, so the bubbles are in none-productive sectors like housing, financial assets, carbon credits or whatever false sector can be created.

4. Eventually the ratio of debt to earnings makes repayment of the debt impossible and the system unsustainable.
The only temporary cure is the government printing of more money, and devaluing the money.

The signal which indicates the imminent demise of the fiat money is the rapidly devaluing of the money. The purchasing power of the money is measured with, yes that fiddled indicator, the CPI.

The value of money can also be measured against more than just consumer good and services. It can also be measured against commodities, goods with an inherent value because of their use, and last but not least, also against the commodities used for longest periods as money, gold & silver.

And that finally leads me to one of the most important indicators of the health of an economy and its money, and why it is an obvious target for manipulation by governments in order to paint a more positive picture. The price of gold and silver. For when, and it is a when, people start to realise that the fiat system they are using is entering the end game, that its life-cycle is nearing its end, they will rush to the more reliable money that does not suffer from the short erratic life-cycle of fiat money.

It is at that time that there is a rush to the exit, but only some make it through, leaving many behind with very reduced wealth.

This article by the excellent writer Rob Kirby details the gold sell-off by Gordon Brown at the very bottom of the gold price in 1999, despite all the words of caution from experts around him.

G20 U.S. Dollar Fiat Currency Smoke and Mirrors Manipulation
http://www.marketoracle.co.uk/Article9849.html