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What is FIAT and how broken is the system?
FIAT money is government-issued currency that is not backed by a physical commodity, such as gold or silver. The value of FIAT is derived from the relationship between supply and demand and the stability of the issuing government
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FIAT money is government-issued currency that is not backed by a physical commodity, such as gold or silver. The value of FIAT is derived from the relationship between supply and demand and the stability of the issuing government
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Most modern paper currencies are FIAT currencies, including the U.S. dollar, the euro, and other major global currencies.
It was introduced as an alternative to commodity and representative money (a medium which has its own intrinsic value).
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It was introduced as an alternative to commodity and representative money (a medium which has its own intrinsic value).
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Government-issued banknotes were used first during the 11th century in China. Since then, they have been used by various countries. FIAT money started to predominate during the 20th century. Since President Nixon's decision to decouple the US dollar from gold in 1971.
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The process of new money creation happens with a central bank purchasing financial assets or lending money to commercial banks. Banks then redeploy this base money by credit creation through fractional reserve, which expands the total supply of "broad money".
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All the above technical jargon can be translated in a simpler manner:
FIAT money is DEBT based. It represents debt, and debt is a promise for the future.
A PROMISE that occasionally is not fulfilled.
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FIAT money is DEBT based. It represents debt, and debt is a promise for the future.
A PROMISE that occasionally is not fulfilled.
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Debt default is common, it happens everyday at private level. It is not a bug, it is a feature.
The problem is when the default happens in a systemic level.
But that's an event never personally lived by most people alive today. At least in the "developed" countries.
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The problem is when the default happens in a systemic level.
But that's an event never personally lived by most people alive today. At least in the "developed" countries.
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So FIAT money is a promise about future wealth. Something that you could trade for in the future.
Think about your salary. You don't receive goods or services in your account, you receive money.
You use that money LATTER to purchase something.
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Think about your salary. You don't receive goods or services in your account, you receive money.
You use that money LATTER to purchase something.
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With your salary is not about the value in $ you are paid but instead the goods and services you have access.
Money is just a medium for the real goods.
Doesn't matter how many raises you get if the amount of goods it allows you to get is shrinking. This is inflation.
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Money is just a medium for the real goods.
Doesn't matter how many raises you get if the amount of goods it allows you to get is shrinking. This is inflation.
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Now let's look at this at scale.
The total amount of debt in the world represents the expectation of future wealth creation in the world.
And that expectation is reflected in FIAT currency.
The available money will eventually be redeemed in something with real value.
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The total amount of debt in the world represents the expectation of future wealth creation in the world.
And that expectation is reflected in FIAT currency.
The available money will eventually be redeemed in something with real value.
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Of course there is no perfect system and the problem of debt are defaults.
Defaults at private level are a feature.
They are common and expected.
Bank rates account for expected losses.
Any venture has underlying risk that is priced in the capital allocation.
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Defaults at private level are a feature.
They are common and expected.
Bank rates account for expected losses.
Any venture has underlying risk that is priced in the capital allocation.
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The beauty of capitalism is the risk/reward feature. There is a premium for those that take risks.
The cost is to support the loses. Risk takers have a huge incentive to succeed at the cost of personal loses.
Loses are limited to the venture participants.
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The cost is to support the loses. Risk takers have a huge incentive to succeed at the cost of personal loses.
Loses are limited to the venture participants.
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When you raise money for your venture if you fail the loses are limited for your venture participants.
The system as a whole gains with the winners that hopefully compensate the loses from those who fail.
Something that may seem odd:
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The system as a whole gains with the winners that hopefully compensate the loses from those who fail.
Something that may seem odd:
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The most innovative industries are those with the bigger failure rates.
There is no place with so many companies going bankrupt as there is in silicone valley.
If you want to burn your live savings try to open a restaurant. There is hardly a more competitive sector.
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There is no place with so many companies going bankrupt as there is in silicone valley.
If you want to burn your live savings try to open a restaurant. There is hardly a more competitive sector.
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The engine of wealth creation seems to be powered by a cycle of experimentation with unavoidable failures.
Failures supported by risk takers that have a huge incentive to succeed.
And a big payout in the case of success.
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Failures supported by risk takers that have a huge incentive to succeed.
And a big payout in the case of success.
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A fundamental aspect of capitalism is the risk ownership.
It works as a key incentive to keep systems working.
The following stories are real and illustrate very well what I'm trying to state about risk ownership.
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It works as a key incentive to keep systems working.
The following stories are real and illustrate very well what I'm trying to state about risk ownership.
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At some point in time a company was delivering a project for a client. It was a multi million dollar endeavour.
The team was part of a corporation totally owned by the CEO.
The project success was of course the company success and the CEO success.
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The team was part of a corporation totally owned by the CEO.
The project success was of course the company success and the CEO success.
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The project ownership was assigned to a hired manager that worked with the team to deliver the first milestone.
When the date for the first milestone was close the manager could not hide anymore from the CEO the problems related with the first delivery.
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When the date for the first milestone was close the manager could not hide anymore from the CEO the problems related with the first delivery.
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The project deviated from the initial scope. Some defects were accumulating and some delays in key components were unavoidable.
The problems were a mixture of some naiveness in the team, unanticipated issues and delaying on assuming the real dimension of the problem.
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The problems were a mixture of some naiveness in the team, unanticipated issues and delaying on assuming the real dimension of the problem.
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The CEO was tough with the team and the extra costs on the project were not taken lightly.
But in the end the CEO's ultimate goal was to deliver the best possible given the context.
He spent the following months working closely with the team.
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But in the end the CEO's ultimate goal was to deliver the best possible given the context.
He spent the following months working closely with the team.
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Weekends and nights.
They worked together to find some compromises with the client.
In the end the total loss was avoided and the project was still a success for the client.
This story is an example of what it means to have skin in the game.
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They worked together to find some compromises with the client.
In the end the total loss was avoided and the project was still a success for the client.
This story is an example of what it means to have skin in the game.
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The other story is quite the opposite.
There was some EU funds that distribute money to fund some companies that try to innovate in some key areas.
The program here is Portugal 2020.
The program candidature demands some paperwork that obligate several commitments.
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There was some EU funds that distribute money to fund some companies that try to innovate in some key areas.
The program here is Portugal 2020.
The program candidature demands some paperwork that obligate several commitments.
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When the project is approved the money is released when the commitments are reached in the proper timelines.
So there is some rules that are set to stone and the game is to fulfil them.
Now the problem is reality rarely is what we expect. Remember the previous story?
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So there is some rules that are set to stone and the game is to fulfil them.
Now the problem is reality rarely is what we expect. Remember the previous story?
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Now if the project faces any challenge to make the deadline there is no stakeholder with skin in the game to charge you neither to help you with any workaround.
What you find are poker face bureaucrats that only function is to point to some metric you didn't reach.
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What you find are poker face bureaucrats that only function is to point to some metric you didn't reach.
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Wood supplier delivered defect doors and it delayed the work? not my problem.
The pipe broke and the inundation put extra costs to the budget? not my problem.
You found a better opportunity in the market to sell hot dogs instead of vegan burgers? not in the original plan
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The pipe broke and the inundation put extra costs to the budget? not my problem.
You found a better opportunity in the market to sell hot dogs instead of vegan burgers? not in the original plan
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