Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. … Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange (such a good is called a commodity).
Central economic planning at its core is anti-democratic and the antithesis of a free market. Over time it also inevitably fails. Society does not have the all-knowing and infallible individuals needed to make the right financial and economic decisions for the remainder of society. There is not one individual whose choices are superior to the consensus of millions of people, households, entrepreneurs, and businesses.
Since monetary monopolies create fiat currencies through loan contracts, they provide a legal way of obtaining something for essentially nothing. As a result, those responsible for issuing fiat currencies have nearly unlimited influence over economic and political life for society.
Examining the history of the USSR illustrates the problem with centralized economic planning. Central planning of an economy generates a perpetual stream of unintended consequences that lead to incessant interventions and that eventually destroy economic activity.
. Price Instability — Fiat currencies require relatively insignificant physical, economic inputs to be produced. The lack of production requirements means that the value of fiat currencies hold no direct relationship to the economic reality of the physical world.
The value is determined by central planners. Therefore the quantity of currency in a fiat currency is invariably and inevitably incorrect.
This inaccuracy causes price instability and artificially stimulates or depresses economic activity. Its ability to stimulate or depress an economy is a function of how much currency is created and how it is distributed. Essentially price stability can never be reached in a fiat currency.
. Economic Volatility — Since fiat currencies are loosely linked to physical, economic activity in the objective world, they tend to become increasingly decoupled and eventually “un-tethered” over time.
An economy is the aggregate of millions of independent individuals, and there is no way that those responsible for distributing a fiat currency can guess the exact quantity. However, they can identify inaccurate quantities after the fact by their consequences. Incorrect quantities can induce credit booms, recessions, large-scale price bubbles and economic collapses.
For example, the Great Depression, began only sixteen years after the U.S. Federal Reserve was established. It’s also worth noting that economies can be volatile for many reasons. However, the effect of fiat currencies dramatically magnifies economic volatility.
. Currency Debasement — Fiat currencies issued by governments or central banks represent intangible concepts of value like “full faith and credit.”
In debt-based fiat currencies, the currency needs to be continually inflated, or a vicious deflationary circle (a collapse of debt) will occur. Those responsible for the currency predictably produce more than is necessary to maintain stable prices or to sustain stable economic activity. They create an excess of currency to reduce the risk of deflation and for political promises and favors.
A Concentration of Wealth — Over time, fiat currencies cause wealth and property to accumulate to those who have the privilege of creating the currency. This system bias increases the concentration of wealth in society.
First published on Medium https://medium.com/@fmfinfo/7-problems-with-fiat-currencies-48292a24def0