Why are fiat currencies VERY risky and why so few people are talking about it?

Saifedean Ammous dives deep into the concept of fiat-based financial systems and illustrates why they may be A LOT riskier than bitcoins.

This is the second article within my mini series "From Risk to Rescue" where I am trying to offer a different from the mainstream perspective on the existing risks in the financial system.

The main reason why owners of fiat accounts can represent a huge risk is because traditional financial institutions continuously incentivize their clients to use leverage and take more credit risks and punish risk-free savings strategies.

How does it happen?

Fiat currency is government-issued money that is (almost everywhere) not backed by a physical commodity or an asset, such as gold or silver. Its value is derived from government decree, supply and demand in the economy and the overall trust in the society.

Fiat currencies inherently lead to inflation and the gradual loss of purchasing power. Not only central banks' ability to print money without (much) restraint devalues currency over time.? The fiat system in general encourages debt accumulation by both individuals and governments. This debt-driven growth model leads to economic cycles of booms and busts.?

The expansion of the money supply and credit disproportionately benefits those closest to the source of new money (e.g., banks, large corporations, and governments) while eroding the savings of the general population. This phenomenon, known as the Cantillon Effect, exacerbates economic inequality.

Fiat money systems promote a culture of consumerism and short-term thinking. Inflationary pressures discourage saving and prudent financial planning, leading to overconsumption and financial instability.?

When people think short-term, it is much harder to appreciate longer-term efforts, which erodes the principles of hard work, savings, and responsible stewardship of resources. The ability to print money or borrow fosters a disconnect from the tangible value of goods and services. Sound money is crucial for sustainable innovation and the advancement of civilization.?

Another way of putting it: the biggest risk of fiat-based inflationary system is that it functions as a financial pyramid and creates conditions for financial institutions to concentrate their credit risk and counterparty exposure with a few large VIP clients, which in turn, often result in black swan events.

How traditional financial institutions and government regulations manipulate compliance professionals, encouraging us to look at the wrong things and ignore real risks?

Over the last decades many new regulations and requirements were not focused on how to detect and mitigate risks. For example:

• SOX was focused on documenting internal processes and decision-making. It’s like GDPR, if you were compliant before 2019, you did not need GDPR, if you implemented GDPR literally, you probably went overboard and annoyed your customers and stakeholders more than protecting their rights.
• FATCA and CRS did not make anyone more robust or compliant either, it simply introduced more reporting obligations.
• The Dodd-Frank Act significantly reduced the number of smaller banks in the US and introduced the concept of de-risking, which essentially means that SMBs and startups were no longer desirable clients.
• BASEL II came into force in 2004 and was not able to prevent the financial crisis of 2008.??
• Basel III came into force between 2017 and 2019, and did not prevent the collapse of Credit Suisse and Wirecard (even though one of its new requirements were rules for systemically important banks).?
• Deutsche Bank has been hanging on by their fingernails since 2017, but there is no political will in Germany to either make it compliant or force it into an orderly bankruptcy.?
• And don’t even get me started on ESG.
• … Almost forgot about the 20+ (? and keep counting) packages of Russia-related sanctions that seem to be written in the interests of the UAE, Chinese and Indian financial institutions and do their best to increase all prices and margins for as many commodities that Russian companies continue selling as humanly possible.?

I have a theory that many short-term thinking regulators deliberately wanted to overwhelm the compliance profession with so many reporting, description-generation? and data-organizing obligations, so that there is no time and mental energy left to actually think rationally about what is risky and how to protect the financial system from over-leverage, corruption, inflated valuations, disappearing savings of average people, and unfair discrimination against smaller businesses, startups and everyone who does not have a traditional stable job.

This is a big reason why so many compliance experts feel deeply dissatisfied with the scope of their daily work: nobody wants to push around excel files to look compliant “on paper” while real risks remain unaddressed simply because regulators do not want to know about them yet.

The first Article within this series is here: https://www.dhirubhai.net/pulse/why-outdated-risk-compliance-norms-deepen-financial-yana-afanasieva-bpvqf