why fiat currencies are stable

[paulkienitz]

The sort of people who promote cryptocurrency have a long tradition, which predates bitcoin, of poo-pooing fiat currencies. They say they can't be trusted. In the old days they would have been gold bugs. But now the allure of speculative bubbles, which these pseudo-currencies are designed to constantly produce, have got a lot of these people suckered into thinking that these highly volatile and inherently valueless abstract "coins" are the future of money, and more trustworthy than fiat currencies.

So why do fiat currencies end up being trustworthy and stable, when you can't see what gives them their value?

I think the explanation comes down to incentives. The world has many fiat currencies, and they have a competitive relationship with each other. And the way to win that competition is to be the most robust and stable at storing value. People want to spend their inferior currencies and save their superior ones. The central banks and reserve boards that back the world's major currencies have strong incentives to keep their currencies as stable as they can. Those who succeed have their currencies used around the world, rather than only at home.

The big winner at this competition has been the US dollar. It is used and desired everywhere. And I don't think most people appreciate what a powerful and effective thing that is. The United States used to be the strongest country in the world because it had the best technology and manufacturing. That's no longer true, but it's as dominant as ever, just because it has the best currency. It's so desirable that we run a substantial "trade deficit" which is actually not a deficit at all, but a privilege most countries would dearly love to achieve: the ability to import goods essentially for free by printing money for export.

Every other major currency wants to be as desirable as the dollar. The strength of the dollar is why the EU came up with the Euro, even though it hurt many of their member countries. The Chinese are very much hoping to internationalize the renminbi, and if they do we're gonna notice the effects.

The rewards of having a fiat currency that's sound and stable are immense, and that gives every fiat currency backer all the incentive they need to produce something sounder than any crypto-coin is ever likely to become even in a best-case scenario.

[fescuerescue]

1. They are as stable as the government that backs them.

If January 6th had went the wrong way......

[Gaugamela]

2. Out of curiosity (I'm not disputing what you're saying),

do you think that if the world adopted a single universal fiat currency that it would be less stable, since there would be no competition, and no nation with the advantage of holding a reserve currency?

[paulkienitz]

7. I think the answer to that question would have to be determined by trial and error methods

I don't necessarily expect that to be a problem, but I sure don't want to assume it won't be.

With only one currency I think there'll be some tendency for it to keep its value just because there's no alternative.

[YP_Yooper]

3. Love the topic

Why are they stable? Mandated by the government and taxing authorities (ie, fiat). Well, and today wrt the USD, by US military might. The day the Federal Reserve comes out with their "coin", all others will fall.

Digital coins are like going to the casino. Nothing more, nothing less.

Why can't coins be used like the USD? Exactly as you said - stability. Imagine spending Bitcoin for two pizzas just 10 yrs ago

...and you're $384 million in the hole. Yes, you read that right [link:https://decrypt.co/71713/bitcoin-spent-on-two-pizzas-in-2010-now-worth-384-million|

This is why they can't be used as a medium of exchange.

The French saw this exorbitant privilege, and the US defaulted on our currency as a result. ][link:https://en.wikipedia.org/wiki/Exorbitant_privilege|

As far as gold is concerned, you absolutely cannot discount something that the central banks across the world hold as their only physical asset and the basis for the Euro.... everything is paper until the game ends, and all the central banks have left is gold.

Something in the back of my head says they don't play to lose, either.

[roamer65]

4. Voltaire.

“All paper currencies eventually return to their intrinsic value…zero”.

[Klaralven]

5. They are sort of stable because the government requires people to use them to pay taxes

And the government can use them to buy goods and services. And the government can require debtors to accept them in payment of debts by creditors.

The government can do this because it has political power.

And "Political power grows out of the barrel of a gun."

[rampartc]

6. modern monetary theory explains that the value of the fiat dollar is maintained

by the fact that dollars, to the exclusion of all other media of exchange, will be accepted as payment of taxes.

when taxws are lowered, the value of the dollar decreases as well.

i don't doubt that republicans are so stupid (which is really a nice way to say economically illiterate) that they will soon accept bitcoin as tax payments.

“The process by which money is created is so simple that the mind is repelled.”

― John Kenneth Galbraith,