Technology, Money & Questions

Majority of the countries in the world have the fiat money system in place. The currency of such countries are not backed by any commodity [like gold or silver]. Fiat money any country as such is worthless without the backing of the government of that country. Fiat money is the legal tender according to the government decree of collecting taxes and other charges. The value of the fiat money is only backed by the confidence of the people over the government as well as the other financial institutions those who accept the fiat money. The value of all the commodities in the country fluctuates purely based on its demand.

Since, the fiat money is not actually being backed by any commodity, the federal reserve of a country has enormous control over the monetory condition of its country. During economic recession a country following fiat money system can ingest more cash flow in to the economy in order to help in the recovery.

In the recent recession time, the US Federal Reserve have printed 1.7 trillion dollars and pushed into the economy literally backed by nothing. Ever highest in American history. What does this actually means? The purchasing power of the US dollar is actually reduced because of this very high liquidity.

The fiat money system has its own intrinsic difficulties. Since, the countries are allowed to print as much paper money as they want, there is a very high chance for HYPER INFLATION if proper regulations are not in place. Hyper inflation is the terminal stage of any fiat currency. Hyper inflation is often the result of increasing regular inflation to the point where all confidence in money is lost.

In a fiat monetory system, the value of money is determined by the confidence. Usually, fiat money loses its value when the government which acts as the issuer refuses to further guarantee its value.

As long as we've got strong monetory policies governed by the federal reserve, backed up by the government, the fiat money will continue to have its value.