why fiat currencies are stable [View all]

[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.