So, hyperinflation and currency collapses are not exceptionally rare events. In fact, the average lifespan of a fiat currency is only about 35 years, which means these events happen much more frequently than many people realize.
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What Is Fiat Money? Understanding Fiat Money. History of Fiat Money in the U. Advantages and Disadvantages. Fiat Money FAQs. Key Takeaways Fiat money is a government-issued currency that is not backed by a commodity such as gold.
Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U. One danger of fiat money is that governments will print too much of it, resulting in hyperinflation. Provides flexibility Gives central banks greater control over economy Seigniorage. Risk of inflation Not fool-proof way to protect economy Opportunity for bubble.
Why Is Fiat Money Valuable? Article Sources. With interest rates kept near zero, special measures in the form of money printing were needed to boost the economy and create jobs. These cycles have been repeating for centuries. Stage 1 is fuelled by optimism and euphoria as politicians promise growth stimulus with the least amount of pain and discipline. In the beginning, there will be promise of fiscal responsibility to print only what the country needs and live within the budget means.
However, such period is usually short-lived as politicians and central bankers will soon give in to temptation to print more money so as to stimulate growth. In Stage 2 , restrictions would be slowly removed from the currency-creation process. The idea of paying off debt is no longer important as compared to growth.
As a result, growth becomes the single most important driver of the fiat system. As currencies gradually lose value, due to declining purchasing power, people have to work longer hours to maintain their standard of living. Stage 3 is the gambling stage where excessive liquidity makes its way into the stock market and real estate market. Growth will start to slow down and therefore, more money needs to be created to stimulate growth. This means that interest rates must be maintained at artificially low levels.
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