Fiat currency

[old man emu]

As mentioned elswhere, Trump's World Liberty Financial issued a stablecoin designated as $USD1. Stablecoins are digital assets pegged to a fiat currency, in this case, the U.S. Dollar. So what are a 'fiat currency' and its operating device, 'fiat money'. Fiat money is a type of government-issued currency, authorized by government regulation to be legal tender. Typically, fiat currency is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. 

 

In days of yore, kings, emperors and other governing bodies facilitated trade across distance by producing tokens (coins) to which they assigned a nominal value, usually based on a set amount of the valuable physical item. Evenutally the valuable physical item came to be a metal. The metal could be gold, silver, copper or an alloy such as bronze. The common feature of the item was that it could be used to produce other things such as jewellery in the case of gold and silver, or simpler objects in the case of copper and bronze. The value of the item was related to a predetermined value of the metal, and that value was set by the producer of the item. 

 

As the populations of the regions using coins increased, and the amount of trade carried on over large distances increased, the amount of valuable physical material available to produce coins lessened. Also as the value of transaction increased, it became difficult to carry large weights of coins over long distances. So 'paper money' was invented.  Paper money was first used in China in the 7th century A.D.  Like modern banking, individuals would deposit coins with a trustworthy party and receive a note indicating the amount. The note could then be redeemed for currency at a later date. In other words, the note was backed by actual physical items. 

 

Eventually global trade grew to such levels that governments could not continue to meet the promise of exchanging note for valuable physical items made of "precious" metals. This lead to the adoption of fiat currencies and fiat money. In monetary economics, fiat money is an intrinsically valueless object or record that is accepted widely as a means of payment. Accordingly, the value of fiat money is greater than the value of its metal or paper content. Fiat money generally does not have intrinsic value nor a 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. They trust that it will be accepted by merchants and other people as a means of payment for liabilities.

 

From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States dollars to one troy ounce of gold. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars with the dollar convertible to gold bullion for foreign governments and central banks.  Other currencies were calibrated with the U.S. dollar at fixed rates: for example the pound sterling traded for many years within a narrow band centred on US$2.80. The Bretton Woods system was ended by what became known as the Nixon shock, a series of economic changes by United States President Richard Nixon in 1971. These changes included unilaterally canceling the direct convertibility of the United States dollar to gold. Since then, a system of national fiat monies has been used globally, with variable exchange rates between the major currencies.

 

In modern economies, relatively little of the supply of  money is physical currency. For example, in December 2010 in the U.S., of the $8,853.4 billion of money supply in all forms , only $915.7 billion (about 10%) consisted of physical coins and paper money

 

So now, all those trillions of dollars spoken of in relation to international and domestic debt are simply numbers in ledgers. Their actual worth relies solely on the promises of the buyer to pay the seller what is owed. Global debt reached a record high of nearly $346 trillion by the third quarter of 2025, driven by surging government borrowing in both developed and emerging markets. This figure represents over 300% of global GDP. That means that roughly only $115 trillion in debt could be met through productivity. The remaining $230 trillion is Scotch mist.

 

 

[onetrack]

The BBC has a good article on fiat currency.  Marco Polo became excited beyond belief, when he discovered mulberry bark currency notes circulating in China in the late 1200's.

 

He wrote enthusiastically about the entire process of manufacturing the notes from bark, and how the ruler Kublai Khan authorised his deputies to put their seal on the notes, to guarantee their authenticity and value.

 

Of course, as with all fiat currencies, a lack of gold or silver backing, counterfeit money, and excessive production of the notes led to severe devaluation, and the mulberry bark currency became worthless.

 

It was possibly worsened by a decline in Kublai Khans power, caused by excessive warring (especially with Japan), financial mismanagement, corruption amongst Govt officials, and high taxation levels.

 

https://www.bbc.com/news/business-40879028

 

"THE TEXT:

You must know that he has money made for him by the following process, out of the bark of trees – to be precise, from mulberry trees (the same whose leaves furnish food for silk-worms).

The fine bast between the bark and the wood of the tree is stripped off. Then it is crumbled and pounded and flattened out with the aid of glue into sheets like sheets of cotton paper, which are all black.

When made, they are cut up into rectangles of various sizes, longer than they are broad. The smallest is worth half a small tornesel; the next an entire such tornesel; the next half a silver groat; the next an entire silver groat, equal in value to a silver groat of Venice; and there are others equivalent to two, five, and ten groats and one, three, and as many as ten gold bezants.

And all these papers are sealed with the seal of the Great Khan. The procedure of issue is as formal and as authoritative as if they were made of pure gold or silver.

On each piece of money several specially appointed officials write their names, each setting his own stamp. When it is completed in due form, the chief of the officials deputed by the Khan dips in cinnabar the seal or bull assigned to him and stamps it on the tops of the piece of money so that the shape of the seal in vermillion remains impressed upon it. And then the money is authentic. And if anyone were to forge it, he would suffer the extreme penalty.

- Marco Polo, The Travels, 14th Century AD"

 

Edited February 2 by onetrack

[nomadpete]

I never has enough Fiat currency to buy a new house, so I made do with a Renno

[nomadpete]

The global debt looks like a top heavy inverted pyramid.

 

What will make it topple?

 

 

[facthunter]

My Currency currently is so small you can't Fiat.  I've Had a few Fiats, but None currently. Nev

[facthunter]

Time Pete Time. It's NOT IF but WHEN. Nev

[nomadpete]

Time to liquidate my fiat currence.

The BWS has a great exchange rate at the moment.

When the big crash comes, at least I'll have good wine.

[old man emu]

Listen you petrol heads!  In relation to Economics, the term fiat derives from Latin for "let [it] be done", used in the sense of an order, decree or resolution. Looking at the history of this type of currency, the "order, decree or resolution" came from the rulers of the society. 

[onetrack]

It's a sad fact of life, that money, which originally came into use with a fixed exchange rate with silver or gold or copper, soon became highly variable in value when that exchange rate was dropped, and rulers/kings/dictators/emporers stated it would have "floating value". The rulers rapidly realised that allowing the currency to have different values at different times, gave them more power over their economys and peoples.

 

We have fixed, set values for weights and measures, but have no set fixed value for our currency. Inflation is just part of our daily life today, and it goes up and down like a yo-yo, but the value of our assets and earnings constantly bounces around in real value terms, simply because our currency is constantly being devalued. No politician or leader would ever vote for a fixed currency in todays world.

 

Billions are made in profits overnight, thanks to "currency trading", which is merely pea-and-thimble trickery, based on varying values assigned to various currencies at various times. Currency should never be traded, that is a sign of basic economic instability.

However, financial experts and economists continually fiddle with economic and currency adjustments, and tell us all is well - we are much richer than we used to be, just look at the numbers!

 

 

 

Edited February 2 by onetrack

[facthunter]

Things that seem too good to be true are just that, so often..  They trade on greed and the " I mustn't miss out" mentality. A fool and his money are soon Parted.  Nev

Edited February 3 by facthunter
typo

[rgmwa]

So crypto is not even worth the paper it’s written on then?  

[facthunter]

Those are your Words, Not Mine. Nev

[rgmwa]

They are, but it wasn't a response to your comment, Nev. 

[facthunter]

HOW would I Know that? Nev

 

[rgmwa]

Because I would have quoted your comment in my reply.

[Jerry_Atrick]

Back to topic... 

 

Money, represented by currency, is defined as a store of value which can be readily exchanged - more or less. In the official currency makets, differernt currencies are generally those that are the official sovereign currencies, plus in their own right, gold (XAU), silver (XAG), platinum (XPT), and now bitcoin (BTC). The gold standard (or any other standard) was a way to manage supply of the currency. For all practical purposes, you couldn't and wouldn't on a daily basis walk to the RBA, BoE, or Fed and say can you please provide me with $100  (£100) of bullion and they would cough it up or allocate your name to the sliver you would be entitled to. 

 

Whilst the economic doomsdayers predict the Fiat currencies will be the harbinger of economic malaise. This is not true. First, whether or not a currency is backed by anything, for it to be recorded in a ledger somewhere, there has to be one of two things - the actual stock (physical, or in the case of Bitcoin, electronic) stock, or a promissory note (i.e. debt for it). A gold backed dollar doesn't suddenly increase the gold backing it because  it has been lent out. If a dollar is lent out once, there will be an entry for that $ of the liabilities side of one person's balance sheet and the asset side of the others.. but that dollar will now have been used twice. If it is gold backed, they don't add another 1/3000th of an ounce to now back both of those economic instances of the one dollar. But the dollar must exist once, and it must be held as debt once. 

 

There are two values of a currency - the value compared to other currencies, and its pure domestic value. Of course, these days where international trade is by far most prevalent, the first value weighs heavily on the second value. But if you think about it, except for setting prices of goods imported or imported factors of production(e.g. machines, software, etc) that contribute to the cost of locally made stuff, most Australians only worry about the value of what the Aussie dollar buys them.. they don't think about it in terms of, weill, this covnerted to USD or GBP or XAU is how to value what they are buying. 

 

Currency markets are now so well established, and the currencies traded are measurable, supply is controlled, and can be usually readily exchanged. A few years ago, when we were doing conduct risk for high frequency, low latency FX trading, the markets were functioning so well, that trying to profit from say the difference between the value of GBPUSD, to USDAUD, by targeting the GBPAUD pair (so trying to profit from any difference in comparative rates) was nigh on impossible. The rates triangulated almost perfectly all the time and the window in which they weren't was so tiny, unless you were willing to bet the house on it, it would cost you more in electricity than you would make. 

 

The FX market is the largest volume traded daily in the world - it is about $2 trillion a day more than derivatives, and probably half of the derivatives markets are in FX underlying products. So, the true market in FX is a lot bigger than say interest rate derivatives. An exchange rate is both the measure of the demand v supply of that currency pair, referenced to the $USD. That demand is based on the curent economic situation and outlook using well established statiscal measures weighted by things such as transparency, perceived accuracy, and level of compliance with the rule of law. Ultimately, this includes the capital structure of the soveriegn part of the economuy and the ability of the economy to service its debts and grow wealth/GDP. Some currencies are valued so lowly as to effectively be excluded from the markets. 

 

The monetary value that is ascribed to something is entirely arbitrary - well, maybe except for the staples. That V12 e Type convertible Jag would be worth something like £15,000 to me, bit to others, it is worth more than 10 times that. But, I would happily pay $150K for an XC Ford Cobra as it had that much more value to me (nostalgia is the worlds most expensive commodity). I see an unrestored one went on australianmusclecars.com.au for $339K.. slightly north of my £150K at current rates@ https://australianmusclecarsales.com.au/cars/1978-ford-falcon-xc-cobra-build-no-322-unrestored-16-462km-6770

 

I know most of you would scoff at the thought of an XC Cobra being worth more than an e Type V12 convertible, but there happens to be one of the latter for sale now: https://www.pistonheads.com/buy/listing/15183690?store=616141&utm_medium=VLA_paid_search&utm_campaign=&utm_content=&gad_source=1&gad_campaignid=20960347110&gclid=Cj0KCQiAhaHMBhD2ARIsAPAU_D6tWhHvfKziGA5MzKIYDUE1cL5AYW0wKxQA7ef57RZjIo23M6vkS1gaAomDEALw_wcB 

 

(slightly cheaper than I thought it would be). 

 

I digressed.. sorry... 

 

Getting back to currencies, these days, as a store or representation of value, a currency is backed by its government, with 4 exceptions.. The currency value compared to others is based on the nations' econcomic performance and outlook and its ability to pay its debt (og, and relative interest rates, as long as it can pay its debt). Gold backing is no longer required and is a currency in its own right. However, ultimately, as with anything inclduing gold, the value ascribed is entirely arbitrary.

 

 

Edited 16 hours ago by Jerry_Atrick

[old man emu]

10 hours ago, Jerry_Atrick said:

a currency is backed by its government,

But is the $US backed by Washington or by the Fed? 

 

10 hours ago, Jerry_Atrick said:

The currency value compared to others is based on the nations' econcomic performance and outlook and its ability to pay its debt (og, and relative interest rates, as long as it can pay its debt).

That's the worry with the economy of the USA as it is at present.

[onetrack]

Washington is the backer of the $US, but the Federal Reserve is charged with keeping the U.S. monetary system stable and functioning properly.

The Federal Reserve is independent of any political demands and consists of 12 Reserve Banks and a committee that sets U.S. monetary policy, with particular emphasis on interest rates, which are a key monetary driver of any economy.

The overwhelming belief amongst U.S. politicians is that the Federal Reserve must operate completely independently of any political interference and be allowed to make monetary policy corrections that it believes are needed to keep the U.S. economy and the $US on an even keel.

However, the Tangerine Toddler believes he alone has to totally control the monetary policy of the U.S., and I reckon a lot of financiers and economists lose a lot of sleep over what would happen if the Tangerine Toddler got his way, and took control of the levers of the money machine.

 

https://www.clevelandfed.org/about-us/understanding-the-federal-reserve

[facthunter]

The Orange U Tan will Bugger it UP of Course. He's been Bankrupt at Least 2 times. Nev

[red750]

Jerome Powell is the current Federal Reserve president, but Trump has been calling for his head for some time. His term will expire in May, and Trump has his replacement lined up.