Fiat Money Explained
Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver, or backed by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation.
Fiat money generally does not have intrinsic value and does not have use value. It has value only because the individuals who use it as a unit of account – or, in the case of currency, a medium of exchange – agree on its value.[1] They trust that it will be accepted by merchants and other people as a means of payment for liabilities.
Fiat money generally does not have intrinsic value and does not have use value. It has value only because the individuals who use it as a unit of account – or, in the case of currency, a medium of exchange – agree on its value.[1] They trust that it will be accepted by merchants and other people as a means of payment for liabilities.
FIAT MONEY WEAKNESSES
INFLATION
One of the most well-known disadvantages of fiat money is the potential for inflation. Because fiat currency isn’t linked to any valuable commodity, it can be produced in unlimited quantities, especially if a government is facing budget deficits or high levels of debt. This can lead to a vicious cycle of debt and inflation, potentially leading to economic bubbles.
TRUST iN THE GOVERNMENT
Fiat money gets its value from the trust and confidence placed in the issuing government. So, the value of the currency depends on the economic conditions of the issuing country and the stability of its government and institutions.
MANIPULATION
Since there is no limit to the amount of fiat money in circulation, it is subject to constant manipulation by the central bank and the government. This can lead to inflation, interest rate manipulation and other issues.
One of the most well-known disadvantages of fiat money is the potential for inflation. Because fiat currency isn’t linked to any valuable commodity, it can be produced in unlimited quantities, especially if a government is facing budget deficits or high levels of debt. This can lead to a vicious cycle of debt and inflation, potentially leading to economic bubbles.
TRUST iN THE GOVERNMENT
Fiat money gets its value from the trust and confidence placed in the issuing government. So, the value of the currency depends on the economic conditions of the issuing country and the stability of its government and institutions.
MANIPULATION
Since there is no limit to the amount of fiat money in circulation, it is subject to constant manipulation by the central bank and the government. This can lead to inflation, interest rate manipulation and other issues.