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Fiat Money Explained

FIAT MONEY

Fiat money is a currency not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity.>

Fiat currency is typically designated by the issuing government as legal tender and is authorized by government regulation.

NO INTRINSIC VALUE

Fiat money generally lacks intrinsic value and does not have use value. It holds value solely because individuals using it as a unit of account – or, in the case of currency, as a medium of exchange – agree on its value.

They trust that it will be accepted by merchants and others as a means of payment for liabilities and obligations.

FIAT MONEY WEAKNESSES

INFLATION

One of the most well-known disadvantages of fiat money is the potential for inflation. Because fiat currency isn’t linked to any valuable commodity, it can be produced unlimitedly, especially if a government faces budget deficits or high debt levels. This can lead to a vicious cycle of debt and inflation, potentially leading to economic bubbles.

TRUST IN THE GOVERNMENT

Fiat money gets its value from the trust and confidence placed in the issuing government. So, the currency's value depends on the issuing country's economic conditions and the stability of its government and institutions.

MANIPULATION

Since there is no limit to the amount of fiat money in circulation, it is subject to constant manipulation by the central bank and the government.