We are getting towards the last mile (or 1.6 kilometer) of an experiment that began for the United States in 1913 with the creation of the Federal Reserve. To put a complex story simple, the dollar was gradually moved away from an asset (gold) based currency to a faith (fiat) based promise to pay which is likely not to be fulfilled. The last strike was done in 1971 when the dollar was finally disconnected from any restraint except the whims, greed and fears of a cabal of individuals operating obscurely, answering to just a few. Not many realize that placing the control of a currency in the hands of governments and Central Banks, which are simply tools of the State, is a process that is the cause of much distress for the average citizen even if the promise is always "price stability". Instead of having money being subject to market forces reconciling the interests of savers and borrowers, money is created out of "thin air", by dictat (this is where I think the creationist theory applies the most), and pumped into the economy by truckloads (and soon by helicopters). Where the money ends is often difficult to predict, but the outcome is always the same; inflation. The dirty little secret in front of everyone to see is that inflation is mostly the outcome of government policies of deficit spending (you will not find this in the great majority of economics textbooks). See inflation as the ultimate stealth confiscation of your wealth; the cleptocratic government is spending the newly created money first, which then seeps through the system. By the time it gets to you, your purchasing power has been reduced accordingly at the rate of 2 to 6% per year. It is a very old trick played by governments since they existed; the Romans and the Chinese emperors resorted to inflation to finance their bread and circus policies as do the fascist and socialist regimes of today. The outcome of such a game was always the same; the currency and often the empire eventually died as people lost trust in the promise to pay and saw the emperor as he truly was; naked. The challenge is to fool the population as long as possible in the vain hope that its faith in the fiat currency will endure. So why not "massage" inflation with a few hedonistic measures and account it in such a way that consumers are assumed not to be bothered by the constraints of eating, driving or paying a huge interest only adjustable rate mortgage.
Not entirely out of thin air however money comes from because fiat can only be created by debt, so the issue is to find ways to create debt that is sound enough to be repaid. Otherwise, your house of cards collapse and you fall victim to the horror of central bankers; deflation. This is where the potentially phantasmagoric financial world clashes with the economic reality; there must be some real economic output to pay back debt plus interest. Quite a system of checks and balances, like having two 500 pounds gorillas, one named asset and the other liability, balancing on a pole supported by a needle. Actually, you would like the pole to be very long so that the two gorillas do not see one another, scare the hell out of themselves on how unrealistically big they are and lose balance. With a very long pole, you could have one gorilla weighting only one pound and the other 1,000 pounds and still be in balance; we call this a fractional reserve system. Since one's asset is another liability in a fiat system, the rate of interest is the profit that financial institutions make by lending money issued by Central Banks at the dictated core rate. Thus taking money from the Central Bank at lets say 4% and lending it at 7% is a great carry trade as you get a profit of 3% for virtually doing nothing, except of having the privilege of being an intermediary that cannot be bypassed. You should thus not be surprised to receive so many credit card offers and pleas, if you own a house, to borrow against it, or if you go to any retail outlet, an amazing array of e-z financing. Corporations, such as GM, Ford or GE are more financial institutions than manufacturers these days. Get the house / car / vacation / flat screen TV you "deserve" now; you are entitled to it so they say. We are being flooded with liquidity and we live in an era of hyperinflation; the Greenspan Economy where the fruits of labor are virtually stolen. It is truly unbelievable that most people do not even realize it. We have asset bubbles all over (as the 1929 crash was, an outcome of the Federal Reserve monetary policies) and now the largest asset inflation in human history; the real estate bubble. Words and paradigms are invented to explain them, to hide their true source. Technology is a new paradigms justifying such high and "permanent" valuations (even if they have no assets or profits); you cannot lose investing in real estate.
Is there a way out of this spiral of devaluation and our constant strife to pull ourselves out of it? For most families, both spouses need to work to keep the balance sheet afloat. It is a sad realization that as long as money will be solely controlled by governments, the population will be held hostage to the fiscal (ir)responsibility of those who in theory should be protecting the fruits of our labors and savings. Even in a democratic society, the government cannot be trusted for such an honor system, even the best intentioned ones; they all eventually succumb to the temptation of spending more than they earn by using inflation to hide their Ponzi schemes. Democratic regimes may even be more vulnerable as the time span of elected officials is quite short, so decisions that can be seen damageable on the long term but perceived as beneficial (buying votes, approval, photo ops and names in concrete) on the short run will be made. It is however fascist regimes that have relied on fiat the most as democracy implies a level of accountability. A fiat currency system eventually creates a social dependency on debt which is a form of slavery. People become dependant on fiat generated handouts; the welfare state. The economy gradually hooks itself to government fiat-fed contracts allocated to the well connected first, which leads to misallocations of resources and even more government control like communism did not taught us an economic lesson on the horrors of central planning. The consumer, being fooled by asset inflation (especially in real estate), feels paper-wealthy and stop saving and contracts debt obligations that will likely take decades of lowered standards of living to pay back. The asset may deflate, but the debt remains the same (plus interest); you can be sure that this obligation will be well protected by law. Our monetary system thus needs an anchor more solid than the promise of governments and their central banks and far less corruptible and / or fallible. This anchor has always been there since the beginning of our monetary history.
Gold cannot be created out of thin air (only mined at great effort), cannot be faked, has no political ambitions; it does not care who owns it and for what purpose it is used for. It forces an efficient allocation of resources and accountability, because otherwise its owner gradually or suddenly loses his wealth. It is a store of value that is geographically and temporarily transmissible (try to use Yens to shop in Manhattan or try to spend some Confederate money in Atlanta). So, what one can do in the current situation? Fiat and its support structure are well established and will not go away. As the maxims say, you cannot fight the Fed and markets will remain illogical for longer than you can remain solvent. However, you can move away from fiat by getting rid of large quantities of it before its value whimpers away. The devaluation game will go on until its end, an unavoidable financial crisis that will not be inflated away which will mark the moment where fiat money will reach its intrinsic value; zero. It would be a good idea to own some gold (and silver); it is your ticket to freedom. It is an insurance against the short-sightedness of our ruling aristocracy, even those with the best of intentions (or at least full of promises for a better world for all of us if only they could have more power and money). Debt is the enemy of freedom.