Our dollar is a fiat currency, meaning it is not ultimately exchangeable for anything (if, say, everyone wanted to trade in their dollars at the same time), and only has value because the Canadian government says it does.
We get our paycheques, pay for everyday goods, and (most importantly) invest for our futures, all in Canadian dollars. We are comfortable doing this because our dollars aren’t losing their value very fast. The Bank of Canada diddles with the interest rates in order to keep the inflation rate (how fast the price of everything rises) at 2-3%. We are able to stay ahead of the game as long as our paycheques rise faster than the inflation rate. Nice and cozy, right?
Well, there’s an ugly side to paper currencies. For a variety of reasons, Russia, Argentina, and most recently Zimbabwe (as if Zimbabweans need more things to worry about) have seen inflation rates in the thousands of percent. A loaf of bread goes up in price every day. Retirement savings that used to be able to sustain your for decades are now insufficient to buy cat food.
I find these currency implosions fascinating. And while I don’t lose sleep worrying that the Canadian dollar will follow any time soon, I do think about alternatives to investing in Canadian dollars, or any other fiat currencies for that matter.
Filthy money – makes you want to barter, doesn’t it? How many ducks do you want for that jar of pickles? Tough for the government to tax that transaction …
Gary - One word Dan: gold
Kris - Your blog makes me think. Thank you for being the one part of my day that makes me think.
I (heart) forgetful.ca.
Gary - Perhaps my one word comment wasn’t enlightening enough. I can expand. Back in the day, all fiat currencies were backed by gold. Ever heard of Fort Knox? That is where the US gold is/was held. So, if you borrowed money or held a debt against another country, you could pay back the debt or demand the debt to be paid in either the fiat denominations or with an equivalent in gold. All of the US dollars that existed had to be backed. Now when Nixon was president, France asked for the US to pay them some money that was owed but they asked for it in gold. Nixon didn’t want to do this. So what did Nixon do? He proclaimed that the US dollar was no longer longer linked to gold and the fiat currencies were allowed to float, not backed by any real assets. The consequence of this action is the horrendous mis-management of the US dollar we’re seeing today. They’re able to print as much money as they want and acrue as much debt as they want. As long as other nations keep buying that debt the system is fine. Other countries, like China, need to buy US assets to keep the dollar strong because the US owes them so much. If the dollar free-falls in value compared to other currencies, then the effective debt paid to those countries is much, much less. However, China and other countries are starting to worry about the US mismanagement and are diversifying in other currencies, including increasing their gold holdings. As the demand for the US dollar falls, the strength of the dollar falls.
So where am I going with this? Well, gold is a real thing much like silver, oil, houses, and other commodities. There is only so much of it. It can not be printed (like the US dollar). So, if you have little faith in the fiat system, buy real assets with that currency now so that in the future those assets will be worth much more as hyper-inflation happens.
That concludes my financial lesson. Keep in mind that I have no formal training in economics or financial planning so if you lose money in investments because of me, i claim no responsibility.