Fiat money is a currency that has been issued by governments
that is not linked to physical products such as gold and silver. The value
of fiat currency is usually determined by supply and demand, which is
regulated by governments’ financial departments. The US dollar, euro, and
pound are a few of the stable currencies that are classified as fiat.
Despite its convenience, there are a few risks associated with fiat
currency, including inflation and citizen distrust, which can affect the
purchasing power of many countries.
One of the primary risks of fiat money is inflation, which is a significant
concern as the currency is not dependent on gold. When more money is
printed, the value of the currency decreases, which can be detrimental to
both the government and its citizens. In the event of citizens' distrust and
loss of confidence in the government, the value of fiat currency may fall,
making it less valuable. For example, Zimbabwe encountered a severe economic
crisis in the early 2000s when the central bank started printing large
amounts of money, leading to hyperinflation. The value of the Zimbabwean
dollar plummeted, resulting in ordinary product prices skyrocketing, and
people were forced to carry huge bags of money while shopping.
Despite these risks, the purchasing power of countries like the United
States has increased because of the convenience of using fiat currency. The
easy transactions and the widespread acceptance of fiat money play a
significant role in the increased purchasing power, which helps keep
inflation low. Additionally, governments continue to convince their citizens
that fiat money has purchasing power, which further builds trust in the
currency.
According to Dapp et al., a debt-based “fiat” system is borrowed by
government money paid in a specific time period. For instance, borrowing
from other governments is an example of a debt-based fiat system. On the
other hand, non-debt-based “fiat” system is money earned without debt, such
as tax revenue, debt recovery, and non-tax revenue. This type of system
helps to build trust in the government, which can contribute to increased
purchasing power.
In conclusion, fiat money has both pros and cons. The convenience of using
fiat currency, easy transactions, and high purchasing power can help keep
inflation low, but the risks of inflation and citizen distrust cannot be
overlooked. Governments must continue to build trust with their citizens to
maintain a stable fiat currency system. |