Tuesday, 9 November 2010

Variable real value of fiat money backed by all underlying value systems

Fiat money is:

* money (functional currency within an economy or monetary union) declared by a government to be legal tender that is not commodity money.

* state-issued money which is a medium of exchange for all other economic items in the economy, a store of depreciating real value during inflation and a store of appreciating real value during deflation as well as the depreciating unit of account during inflation and the appreciating unit of account during deflation in an internal economy. Fiat money bank notes and coins have fixed nominal values but either depreciating or appreciating real values. The depreciating or appreciating real value of fiat money - in its form as the functional currency within an economy or monetary union - is indicated by the annual rate of inflation or deflation. Severe hyperinflation can lead to the total destruction of the real value of the entire money supply and all other monetary items within an economy: see Zimbabwe. Neither low inflation nor hyperinflation have any effect on the real value of non-monetary items. Inflation and hyperinflation can only destroy the real value of money (a functional currency) and other monetary items - nothing else.

* money of which the token bank notes and bank coins have no intrinsic value.

All fiat money is created out of nothing: out of thin air.

It is, however, backed by all - the sum total of - the underlying value systems in an economy, namely sound governance, sound economic policies, sound monetary policies, sound industrial policies, sound commercial policies, sound external policies, sound education, sound legal system, sound law enforcement, sound defence force, sound transport policies, sound health policies, sound agricultural policies, sound banking policies, sound accounting principles, etc.

The annual rate of inflation above the central bank´s target indicates how much fiat money has been created in excess of what is considered by the central bank as required in the economy.

© 2005-2010 by Nicolaas J Smith. All rights reserved

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