Fiat Money

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Fiat Money

Postby Senexx » 25 Jan 2011, 10:10

Under a modern fiat monetary system:

1) The total amount of money is not constrained by some fixed amount of gold. Instead, it is constrained by the total output of the national economy. There should be enough money in circulation to run the economy at full steam and buy up every product and service available. A fiat currency moves the theoretical boundary of economic activity beyond some arbitrary threshold dictated by lumps of precious metal and pushes it out to “what the system can bear” based on actual, physical capacity.

2) Spending beyond the economy’s total productive capacity is what leads to inflation. This additional money cannot buy any new products or services (there’s no way to make them since we’re at full capacity), so it goes toward bidding on existing products and services and therefore raises their prices.

3) Your taxes do not pay for any federal government expenditures. Taxes are instead a form of private sector demand reduction. Remember, the economy can only hold a certain amount of money dictated by its maximum productive capacity. If the government wants to spend more money to purchase goods and services, it should tax more to reduce the amount of money in the private sector. If it doesn’t tax more then it risks inflation from having too much money in circulation. Likewise, if it wants to spend less, it should tax less and let the private sector do more spending. If it doesn’t tax less, then the amount of money in circulation is too low and productive capacity sits unused. The idea here is to keep the total amount of money chasing goods and services near an optimum, maximum level. Again, taxes reduce demand in the private sector to make room for government spending.

Note that this turns our normal reasoning on its head. The federal government does not tax you so that it can then spend your money on buying or providing goods and services. It taxes you so that you cannot spend as much of your money on goods and services, which then makes room for it to spend money on them instead.

4) Sovereign governments that issue their own currency are never insolvent. Put another way, there is no such thing as debt to be repaid at the federal level. Why does the government have to issue debt (as under the gold currency regime) when it doesn’t need the money in the first place? It generates money, so neither taxes nor loans made via debt contribute to government coffers.

There are other implications of a fiat currency regime, but these are the most interesting. This is what Modern Monetary Theory is all about—the actual implications of a sovereign government issuing its own fiat currency.
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Re: Fiat Money

Postby Lefty » 05 Feb 2011, 08:54

Also, taxation by the currency sovereign is necessary in order to give value to it's intrinsically worthless currency of issue. By imposing a tax obligation on individuals and firms, and by only allowing that obligation to be paid in the governments own currency of issue (other currencies or lumps of soft metal are not accepted, only the governments own fiat money that was issued by them in the first place), a broad demand is created for what is otherwise worthless tokens and it becomes the most convenient medium of exchange since you can always use it to extinguish your tax liabilities.

This is what gives the thing we generally choose to call "money" it's value.

Some people insist that gold is the ony "true" money, yet there is nothing of any huge instrinsic worth about a lump of soft, yellow metal. Makes nice jewelery and has some limitied application in electronics, but so what? It's good for fuck all apart from that. A thing has value only when everyone agrees that it does. The beads and other trinkits that the crew of the Endevour presented they aboriginies with at Botany bay were inspected and then dropped to the ground - worthless in the Aboriginies eyes. Had they presented them with something such people would have agreed was useful - flour, metal axes, possum skins - an exchange would likely have occurred. The Europeans idea that the Aboriginies would veiw their trinkits as valuable was not shared by the Aboriginies. No, there's nothing special or mystical about gold that has value - it's the shared idea of something having value that makes such value manifest.

By the way, if anyone has doubts about the nature of our fiat money system, it's interesting to note that the "fiat" is Latin for "Let it be done" in reference to Biblical divine creation, of something being created out of thin air - exactly as the Australian dollar is.
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Re: Fiat Money

Postby HBS Guy » 17 Apr 2016, 09:30

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