Fiat money is essentially based on the premises of trust. In our world today, the trading system is based mainly on fiat money. Fiat money means that the currencies in dollar notes are declared to be legal tender by governments. For example a Singapore ten dollar note means that the Singapore government accepts a $10 payment for goods and services within Singapore. This same $10 bill can also be used to pay off $10 worth of debt incurred in Singapore. Therefore all the dollar bills of the respective countries are always imprinted with the country stamp as a watermark. This watermark serves as a form of trust that a dollar bill is legal tender by that country. This is the reason why when the exact same dollar bill that does not have the watermark is considered to be counterfeit.
During the period of barter trading, when a person decides to trade his wheat for another person’s meat, the wheat trader trusts that he will get the meat that he wants. The issue of trust is even more relevant for fiat money. People only use money to invest or buy something provided that they trust the product or service to a certain degree. Why there is a trust is really because there is a provision of value.
The currency that we use is worth a value because the government of that country will honor its value of use. When the Japanese left Singapore after World War 2, the banana notes in circulation became worthless because the Japanese will not honor the banana notes’ value of use for trade in Singapore. When a company does not pay up its debts on time, it is an act of distrust. When debts accumulate, the company will eventually go bankrupt. It is similar in other circumstances as well. When the employee embezzles, he will be terminated immediately even though that employee may be a talented person who is capable of generating huge sales for the company. Without trust, money created and earned will soon be destroyed.
During bull markets, the rate of consumption increases rapidly. Stocks’ valuations are always going up. More loans are being approved by banks and financial institutions. The burst of the housing bubble in the US which led to the subsequent global financial crisis is essentially the huge approvals of loans and investments on seemingly good-to-invest assets. However these so-called ‘good-to-invest’ assets turn out to be toxic assets, which led to the huge credit deficits, leading on to the financial crisis. In other words, there is a huge factor of trust that has being placed by consumers and investors on the ‘good-to-invest’ assets prior to the period of time leading to the financial crisis. When those assets turn out to be toxic, investors lose a lot of money. What happens subsequently is that there is a huge aftereffect which ricochets, creating a huge atmosphere of distrust. How can investors be sure of investing huge sums of money after being given such a rude slap by the toxic assets?
As debt leveraging is a common way to finance projects and ventures, many companies soon finds themselves being unable to repay their enormous debts. This led to the collapse of the Lehman Brothers. This also led to delays on projects completions and other operational disruptions. As a result of deadline delays and the lack of funds, an atmosphere of pessimism arises, leading to a recession as the value of goods and services became less demanded. That is why during recessions, goods and services became cheaper monetarily even though they are still probably the same products and services. Even during bad times, there are still many millionaires and billionaires who have the money to invest. However with the exception of Warren Buffet, most of these investors will be very cautious with their investment approach. But why are they not investing? Why many people rush off to sell their stocks and shares during a recession? It is ironic as if people are rushing to sell of their shares, definitely the value of the shares will drop drastically. And because of that drastic drop in value, it almost seems like the shareholders themselves are creating their ill-fated prophecy of devalued shares. Perhaps if they hold on to it longer, it might be more valuable than just rushing to sell off. The only main reason why they are rushing off to sell those shares is because they perceive that the market is going to hit rock bottom.
Fiat money is essentially based on the premises of trust. The currency that we use is worth a value because the government of that country will honor its value of use. When the Japanese left Singapore after World War 2, the banana notes in circulation became worthless because the Japanese will not honor the banana notes’ value of use for trade in Singapore. When a company does not pay up its debts on time, it is an act of distrust. When debts accumulate, the company will eventually go bankrupt. It is similar in other circumstances as well. When the employee embezzles, he will be terminated immediately even though that employee may be a talented person who is capable of generating huge sales for the company. Without trust, money created and earned will soon be destroyed.
Money is really being created only when trust is being created.
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Dias Lu is an entrepreneur who specialises in self-empowerment, wealth mastery, and entrepreneurial leadership. Currently he is running his internet marketing business and doing part-time experiential coaching.
To continue to benefit from his shared experience, visit his blog at http://www.diaslu.com
While not actively pursuing his dreams, he will be practicing his martial arts, reading and writing articles. He believes that everyone has a right to their dreams and that perseverance and helping one another will achieve exactly those dreams.
He continues to blogs and shares his ideas at http://www.diaslu.com
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