The end of fiat currency

[AJS-]

http://etfdailynews.com/2012/04/19/utah-goes-rogue...

I have a feeling this could be significant. It probably won't happen this year, but it's a step towards developing an alternative system that could have it's day in the not too distant future.

[AJS-]

Wonder if I can get my deposit back on that shack in the woods I just bought.


Seriously though, an alternative system of exchange that is more difficult to pervert at the behest of politicians sounds like a good idea to me.

[AJS-]

I think the definition is pretty clear, it's money that isn't backed by anything, and doesn't have any value other than government decree, i.e. fiat.

So yes, all paper money is fiat.

[AJS-]

Steffan said:

AJS- said:

I think the definition is pretty clear, it's money that isn't backed by anything, and doesn't have any value other than government decree, i.e. fiat.

So yes, all paper money is fiat.

I rather thought you might: I entirely agree with that definition.

In which case the must beg the question, are there any other international currencies? Is there an active real value international currency?

If not then all currencies are suspect, some more than others.

How does this affect economics if all the currencies are inflicted with the same real weakness of being fiat currencies? Does this mean that this is no longer a matter of concern because all the worlds currencies are in the same difficulty?

It comes back to the question of what you use money for. As I understand it there are two main uses

1) A means of exchange
2) A story of value

As a means of exchange fiat currencies work fine. A price level develops, and even with a bit of inflation it isn't too much trouble to keep track.

As a store of value fiat currencies can, with good governance, work. The caveat of "with good governance" though, is not to be taken lightly. The German Bundesbank was the benchmark. The ECB was copied almost wholesale from it. The US Federal Reserve was run by monetarists for decades. The Bank of England was made independent in the late 90s with similar goals. All of them have failed miserably in the goal of maintaining a stable price level and promoting growth simultaneously.

Typically, low interest rates are politically good, so politicians have a bent towards that. However high inflation is bad. And since the two tend to go together it is always a balancing act. Unfortunately many muddle headed people believe that inflation is necessary for growth. Their reasoning being people will bring forward purchases if they believe the price will rise. Thus inflation stimulates consumer spending and boosts growth. A less kind way of putting this is that people substitute out of money and into goods and services, and then we start to see that this isn't such a good thing. Money is failing in it's purpose as a store of value.

It's not a coincidence either. Leaving politicians with the opportunity to collect revenue without overtly raising taxes is just too great a temptation. It's like leaving your dog in charge of your dinner. Teaching him a combination of positive and negative consequences corresponding to his stewardship might work for a while, but sooner or later you will come back to a happy dog and an empty plate.

I'm not one of those who has some misty eyed worship of gold, and I'm not even necessarily in favour of a return to the gold standard, but I can see a very strong argument in favour of a currency backed by some commodity that politicians have no control over.


Incidentally, one of the reasons I'm not wholly pro gold standard is that during much of the time we had it, governments devoted a great share of their energy to securing greater gold supplies. It was at least tangible, as compared with faith in the financial system of any given country, but the consequences were a lot more bloody than bank runs and bouts of inflation.

[AJS-]

DRCAGE said:

If paper dosh was linked to gold or something, what would happen if someone found loads of it?

That happened with the Spanish conquest of South America. Basically as logic predicts, a one off and finite round of inflation. A bit chaotic, but far better than continuous and infinite inflation.