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What role does confidence play?


When we place the enormous global debt in the context of the inflated currencies (see “What role does money play?”), it becomes clear that we live in a system that is only kept going by confidence! It is the people’s confidence in the “paper promissory currency” that truly gives it value. But banknotes today offer only a paltry guarantee: You can exchange these slips of paper at any time for other equivalent banknotes. 

Another aspect is the dependency of governments on other countries. This came about through the sale of gold reserves, which the countries replaced with investments in USD because most governments had great confidence in the USA at the time of the economic boom and expected higher returns on these investments than from the stockpiled gold. If the USD falls under these circumstances, however, the reserves of the respective central bank will also drop. Hence, an imbalance will arise and grow with respect to the actual amount of currency in circulation, causing the currency to lose value. When that happens, people will realize that paper money has no value because it has no backing. People will try as fast as possible to exchange banknotes for physical goods. The velocity of money circulation will increase, and so to inflation, leading to so-called hyperinflation. This will destroy the confidence in the paper money system completely and for good.