State of Fiat Currencies

1️⃣ What is Fiat Currency?

Fiat currency is a form of money that is issued and backed by a central government or central bank, rather than by a physical commodity such as gold or silver. Most modern paper currencies are fiat currencies, including the U.S. Dollar, the Euro, and other major global currencies.

2️⃣ Drawbacks of Fiat

i. Centralized Control of Monetary Policy

The fundamental issue with fiat currency is the lack of control that individuals have over the value of their own money. The value of fiat currency is at the mercy of centralized governments’ monetary policies and economic conditions. This is concerning given that it is not uncommon for governments to implement risky or irresponsible policies to further short-term economic and political objectives, rather than act in the best interest of currency holders.

ii. Hyperinflation Caused by Money Printing

Frequently, governments will print money to stimulate economic growth, provide liquidity, finance fiscal deficits, and pay for government spending. While this approach does make money readily available to borrow and spend, excessive money printing devalues a currency by drastically increasing the overall supply of money in circulation. There are multiple examples of excessive money printing causing currency crises.

• Zimbabwe: The Zimbabwean government, in an effort to stimulate economic growth and pay for public spending, printed a large amount of money to cover the budget deficit. This led to hyperinflation, which reached its peak in 2008, with an annual inflation rate of over 79 billion percent - one of the highest inflation rates ever recorded in human history. The country had to abandon its own currency and adopted a multi-currency system, with the US Dollar and other currencies being used as legal tender.

• Venezuela: The Venezuelan government, in an effort to stimulate economic growth and cover its budget deficit, printed a large amount of money starting in the early 2000s. This led to hyperinflation, which reached its peak in 2018 with an annual inflation rate of over 1,000,000%.

• Nicaragua: The Nicaraguan government, in an effort to finance its fiscal deficit and pay for subsidies and public sector wages, printed a large amount of money in the late 1970s and early 1980s. This lead to hyperinflation, which reached its peak in 1988 with an annual inflation rate of 33,000%.

In fact, many countries in recent years have experienced high levels of inflation due largely in part to excessive money printing, including Turkey (83% in 2022), Argentina (48% in 2021), and Sudan (70% in 2018).

iii. Excessive Fees

Traditional financial services such as bank accounts, credit cards, and wire transfers, which are based on fiat currency, come with a variety of fees associated with them.

These fees often include monthly maintenance fees for bank accounts, overdraft fees, ATM withdrawal fees, wire transfer fees, and international transaction fees, among others. It's also important to note that merchants also pay interchange fees to card networks for credit & debit card transactions. These fees are usually passed on to the consumer in the form of higher prices for goods and services. These fees add up over time and make it more expensive for individuals and businesses to participate in today’s economy.

iv. Limited Financial Inclusion

Many economically disadvantaged individuals are unable to access traditional financial services. For example, individuals who do not have a government-issued ID, a phone number, or a permanent address may be unable to prove their identity. They may also have difficulty providing necessary documentation, such as paychecks, utility bills, or bank statements. However well-intentioned these requirements may be, the fact remains that they serve as insurmountable barriers for those who are unable to fulfill them.

v. Capital Controls

Capital controls are government regulations that restrict the flow of money in or out of a country. These regulations can take many forms such as limits on the amount of money that can be withdrawn from a bank account, restrictions on foreign currency transactions, taxes on money transfers, or obtuse reporting requirements. These restrictions can make it difficult for individuals and businesses to access foreign investment opportunities or spend their own funds, significantly limiting their financial freedom.