What is fiat money?
The first attempt to introduce fiat was recorded in the third century. The Roman emperor Diocletian legally determined the coin course above the nominal price of silver, which was part of it.
However, the first fiat money close to modern is the currency introduced during the reign of the Chinese Tang dynasty in the eighth century. The release of that kind of money was aimed at combating inflation and a private issue of coins, as well as strengthening state control in the field of finance.
The modern financial system and fiat money appeared as a result of the cancellation of the binding of the US dollar to gold in 1971. The United States unilaterally refused to exchange precious metal at a fixed rate and launched the “print” process of unprocessed currencies around the world.
The reason for the abandonment of the gold standard in the United States is a long shortage of trade balance and the inconsistency of the dollar of its real purchasing power.
The gold standard as a generally accepted option for providing state currencies completely ceased to exist in 1973 at the Yamaisky International Conference. From this moment, all courses in the international market are set depending on demand and supply.
Advantages of fiat money
The abolition of the gold standard has provided the state with access to unlimited issue of money. For this, you no longer need to replenish the treasury reserves with gold or other solid goods – the printing of currencies can be timed to any events, plans and goals.
All this gives the state the opportunity to deliver investments in the form of cheap loans to any groups of consumers, contributing to the development of production and increasing demand, thereby increasing the efficiency of the entire economy as a whole.
The main tool for supporting the economy was a quantitative softening program (Quantitate Easing, QE). QE involves the injection of additional liquidity to the markets by buying assets from banks and other financial organizations by the state.
The purpose of QE is to increase the reserves of money in the economy to mitigate monetary policy: reducing the refinancing rate for banks, simplifying consumer access to cheaper loans, reducing system risks, improving investment climate.
Disadvantages of fiat money
Flexibility and freedom in monetary policy can be both good for the economy and turn into a number of problems. Consider key risks.
Lack of internal value
Loss of trust, as a fundamental basis of fiat money, can lead to the loss of the value of all investments and savings, up to a complete stop of the economy as a whole.
The value of a particular fiat currency is determined by the effectiveness of public administration. Stability in the past does not guarantee its preservation in the future due to political risks within the country and abroad.
An example is the 1998 crisis in the Russian Federation and the volatility of the Russian ruble after the start of the war with Ukraine.
The state access to the actually endless emission of currency entails the risk of creating a huge number of unsecured debts. An example is the United States. The country has one of the most developed economies in the world and at the same time the largest debt, the size of which in the first quarter of 2022 exceeded $ 30 trillion or 133% of the country’s GDP.
According to the US Treasury, the annual percentage of debt accumulated by June 30, 2022, amounted to 5% of the country’s budget for a similar period. At the same time, the US budget deficit for 2022 amounted to $ 1 trillion – this difference is compensated by the release and sale of bonds.
According to the management of the US Congress on Budget, in 2031 only interest on the main debt will amount to $ 914 billion. For payments for these obligations, the American government does not have enough money – it is forced to create new debts to pay for old.
A striking example of the inefficiency of the economy based on fiat money is the 2006 mortgage bubble in the United States, which led to the financial crisis of 2007-2008.
Banks established the stream of capital due to the creation of artificial demand for housing. They issued loans and resold these obligations to other banks in the form of derivatives. As soon as borrowers stopped paying interest, and real estate prices stopped growing the entire market collapsed according to the principle of dominoes.
Cryptocurrencies – alternative to fiat money
Currencies secured by gold or other products – not the only alternative to fiat money. The cryptocurrency industry, as a young participant in the global financial system, can contribute to the emergence of more effective economic models.
Lack of restrictions
Cryptocurrencies are based on distributed registry technologies, including blockchain and the concept of an acyclic column. If there is the Internet, anyone can get access to publicly available cryptocurrency networks without restrictions, including Just HODL It – jurisdiction, age, time zone, gender, financial position and political affiliation.
Cryptocurrencies are designed on the basis of the principles of decentralization – no one should have a predominant vote, all decisions on making changes to the system are taken on the basis of public consensus.
The mechanism of emissions
Cryptocurrency emission mechanisms are laid before launching a network or token. Each participant knows in advance how much and under what conditions will be created or destroyed intra -network units of calculation (tokens, coins).
Lack of intermediaries
To send cryptocurrency to the user in the next room or on the other end of the earth, the intermediary companies do not need-it is enough to know the recipient’s address and pay a small commission for the transaction.
To exchange one cryptocurrency for another, there are special decentralized exchanges and exchangers working autonomously from any part of the world – dex.