What is the source of fiat money

Virtual currencies: pop-up money

Money is something virtual. This is a truism today, as book values ​​in the billions and trillions of dollars evaporate in seconds on the stock exchanges. On the other hand, there is disagreement about when this started. Many commentators see the turning point in 1971 when the dollar's gold peg was abandoned and the Bretton Woods monetary system fell apart. The idea that money should only consist of worthless paper or even electronic zeros and ones doesn’t really get into our heads. It is no coincidence that credit card companies have recently countered this discomfort by having their VIP cards such as the American Express Platinum Card made from real precious metal - this is how the abstraction of abstraction symbolically becomes at least a material value again.

Money has always been made up of pure convention

The medium of exchange money has always consisted of pure convention, as the historian Niall Ferguson points out in his large-scale story “The Rise of Money”: “In fact, apart from historical coincidence, there was no reason for the West to imagine money with metal was equated. [...] Money is not a metal, but an imprinted trust. The carrier material hardly seems to play a “money is not metal, but imprinted trust” role: whether it is silver, clay or paper or a monitor made of liquid crystals, anything can serve as money, from the cowrie shells in the Maldives to the giant stone discs that were used on the islands of Yap in the Pacific. And in today's electronic age, nothing seems to be able to serve as money. ”In world history, according to Ferguson, money in all its forms was primarily one thing due to its functions as a unit of account and store of value:“ portable power ”. As a result, trust in the power of money is the only source of its intrinsic value, and in times of digital money this power is buzzing around the globe at the speed of light.

If one accepts this degree of abstraction, one understands that money can be much more than the amount of official means of payment laboriously controlled by the central bank monopoly. Because of the galloping loss of confidence in the national currencies of the West, the power of the central banks is being eroded, and the flight from dollars, euros and pounds is fueling the search for alternative stores of value and payment systems. Digitization does the rest in the creation of a true zoo of competing and complementary payment and accounting systems, which for the most part are still based on the official currencies, but in some cases already form their own closed currency areas in the virtual.

Fiat money and ketchup inflation

Today's central bank money such as the dollar and the euro is fiat money (Latin: fiat = "let it be"): It is created from nothing and is at the same time the only legal tender in the respective currency area (the central banks' monopoly on money is also the biggest legal hurdle for alternative currencies) . That can go well for a while, as with the D-Mark for decades. But fiat money has a built-in tendency towards inflation and is prone to bubble formation unless the central bank is extremely disciplined. The real trigger of the 2008 financial crisis was the preceding era of cheap money and excessive liquidity. During Alan Greenspan's tenure as Fed chief between 1987 and 2006, the money supply (M3) in the US grew by almost 300 percent to over 10 trillion US dollars. Today one tries with the same means to master the European sovereign debt crisis by flooding the market with liquidity, states and banks with central bank money "pressurized".

Inflation is still not noticeable in the euro zone because the expansionary money supply and the recessive tendencies are balanced out and the liquidity is being absorbed in the banking system. But this is a ride on the razor blade. In the short or medium term, the iron law of gravity will take effect, which relates the amount of money in circulation to the amount of real goods and services - and prices will rise.

Kenneth Rogoff, star economist and ex-chief economist of the IMF, believes that it is inevitable that the banknote press should “reach into the poison cabinet” and calmly expresses what politics has so far vigorously denied: an inflation rate of four to six percent is the only means is to "defuse the debt bomb and help us through the debt relief process". Apart from the fact that inflation is anyway the most antisocial and undemocratic way of shifting the burden of national debt onto the citizens and even moderate-sounding inflation rates accumulate over years make a huge difference, things could turn out very differently once the spirit is out of the bottle , namely more abrupt and massive than expected. Economists speak of "ketchup inflation": As when turning a ketchup bottle, nothing happens for a long time before everything spills onto the plate in a gush. In the case of inflation, this does not make the food inedible, but priceless - which one does not have to prompt Germans as the ultimate fear.