Reply to post: Re: Success of fiat

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Re: Success of fiat


Fiat currency and government debt are not the same thing. Many governments have defaulted on their debts, but their currency has survived perfectly fine. The people who lose out when someone defaults would lost out whatever currency that debt was denominated in. Though a loss of confidence in the government can be more serious.

Countries tend to keep their currencies. And even when they (country or currency) collapse, often create new ones and allow people to bring their existing holdings across (sadly often at a loss).

But a fiat currency will basically work so long as enough people believe in the continuation of enough of the institutions and economy of the country that uses it. It might not work perfectly, you might get inflation and deflation and exchange-rate fluctuations. But people will still continue to use it as a means of exchange and a store of value. It's only when trust completely breaks down, as it did in Zimbabwe, and looks like it has/will in Venezuala.

Even in Weimar Germany, the period of hyper-inflation only lasted a couple of years. And that's the most famous example of wheelbarrows full of cash that couldn't buy a sack of potatoes. By 1924-5, they'd got inflation under control again. It wasn't inflation that lead to the rise of Hitler, it was the unemployment and deflation after the 1929 crash that brought Hitler to power. A lesson often forgotten.

It's the deflation in Southern Europe (and consequent unemployment) that will bring down the Euro, if they don't sort their shit out pretty quickly. At minimum with a proper banking union and some sort of system to deal with government debt crises, though to make it work properly requires fiscal transfers.

Fiat currency came along, and despite many failures has supplanted all comomodity-backed ones.

Fiat currencies have also failed. But so have commodity-based ones. Spain found loads of silver in South America. Hooray we're rich! Oh shit, we have inflation, we're no longer rich. Help! The gold standard went wrong more than fiat currencies did. Which is why not only is it no longer used, but almost nobody serious suggests going back to it. Maybe we'll find something better in future, I'm no believer in "the end of history", but so far we haven't.

Crypto currency is just fiat money with nobody in control. OK, in Zimbabwe that control was a bad thing. But the Eurozone was saved by it. The disorderly collapse of that could cause a 1930s style global depression - governments do have their uses. Even if it was the bloody governments that created that particular disaster-waiting-to-happen themselves.

I don't know why you complain about seigniorage though. Sure the US government makes a bit of money from printing dollars. But it's not all that much, and that profit goes to the US taxpayer in government spending or lower taxes. What's your problem? All currency issuers get that benefit. The more they're trusted, the more they get. With the gold standard, that value goes to the gold miners. With Bitcoin it went to the original creators and the miners. The difference being, they didn't share it with anyone. I don't really see it as a relevant point.

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