Are You Exposed to the Risks of the Fiat Financial System? Part 1: Inflation

This is the first of a three part series looking at the risks inherent in the fiat financial system. As the first principle of successful investing is diversification the series begs the question of how can people diversify to reduce their exposure to these risks? As you will discover this is harder than you think.


Saving is no longer a way people can accumulate wealth.

In the United States a person needs to grow their investments by 20% every ten years just to stay even. This is equivalent to putting money into a savings account returning 2% interest a year.[1] At present the best US savings rate is 1.85%.[2] Interest earned on savings accounts is also taxed. In the US current tax brackets are between 10% and 37%.[3] 
 You can find the current inflation rate for your country here:

However, the problem of inflation is greater than this. In a study of 590 currencies hyper-inflation is a major reason currencies fail. [4]

Inflation is the result of a currency losing value. As there are no underlying assets a currency’s value exists only because participants believe it does. This belief is eroded by governments expanding the money supply — literally creating more money. The need to expand money supply is built into the fiat financial system. Because it erodes people’s confidence in the system it is a systemic source of risk.





The US dollar is worth just 4 cents of its value 100 years ago. Any investment must beat this decline just to stay even.

Governments can increase money supply in a number of ways. In each case the money is simply created from nothing. The process of creating from nothing is called creating “reserves”.

Printing more money. In our electronic age this is generally a very small portion of the money supply increase.

Fractional Banking. Governments allow banks to lend more money than they hold. Usually this “Reserve Ratio” is around 10%. This means that for every $10 dollars held by a bank it is allowed to “create” $90 more that are loaned out. These additional $90 are simply entries on a ledger and dramatically increase the money in circulation.[1]

Quantitative Easing (QE). Central Banks put more money into the economy by purchasing government or corporate debt. What do central banks use to make this purchase? Simply more money they create as an entry in their balance sheets. Since the 2008 General Financial Crisis the increase in money supply into the economies of developing nations such as Japan, USA and Europe has been unparalleled in history.[2] For example by October 2014 the US Federal Reserve had accumulated $4.5 trillion from its Quantitative Easing purchases. In comparison, the Mt Gox theft, the worse in crypto-currency history, amounted to $460 million. The Mt Gox theft would have to repeat 9,782 times to reach amount of money the Federal Reserve has injected into the economy through Quantitative Easing.

The scale at which developed countries are having to increase the money supply through Quantitative Easing to support their economies suggests all is not well with the fiat financial system.

[1] and also


Money Creation in a Fractional Reserve System: The diagram shows the process through which central and commercial banks create money by issuing loans. Source:

Stay tuned for Part Two: The Risks of Systemic Institutional Failure.

Originally published in on September 13, 2018.