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What is a fiat currency?

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What is a fiat currency?

A fiat currency is a national currency that is not linked to the value of a solid commodity such as gold, silver or platinum. It therefore follows that the value of fiat money is largely based on the credibility of the specific country’s central bank, which issues the currency.

The difference between fiat money and commodity issue money relates to their value, with commodity money linking to the materials it is made of, such as gold and silver coins. Fiat money by contrast, has no fundamental value – it is basically a promise from a government or central bank that the currency is can be exchanged for goods and services to its equivalent value.

Examples of a fiat currency

Well-known examples of fiat currencies include the pound, the euro and the US dollar. In fact, very few world currencies are true commodity currencies and most are, in one way or another, a form of fiat money.

Advantages and disadvantages of a fiat currency

Pros

Since fiat money is not a scarce or fixed resource – like gold – a country’s central bank has greater control over its supply and value. This means that governments can manage the credit supply, liquidity and interest rates more reliably.

Unlike commodity currencies, which could be affected by the discovery of a new gold mine, the supply of fiat currencies is regulated and controlled by the respective currency’s government. There is less risk of an unexpected devaluation caused by the supply of fiat currencies, as any increase in supply is a pre-empted decision made by a fiat currency’s government.

Cons

Since it is not tied to a touchable asset, the value of fiat money is dependent on the stability of the fiscal policy of the particular government in question. Irresponsible policies in this area can lead to inflation and even hyperinflation of a fiat currency.

Adding to this, there is greater chance for bubbles with fiat currency – an economic cycle in which there is a rapid increase in price before an equally quick fall.

The increased occurrence of bubbles is due to fiat currencies having a virtually unlimited supply, which means that quantitative easing is an option. This can also cause greater inflation rates. This could impact anything from housing prices to national debt levels, which in turn could impact the financial markets.

The future…

Despite the increasing popularity of the digital form of fiat currency, cryptocurrencies also stand out as a means of legal tender regardless of jurisdiction. However, whilst there are many advantages of cryptocurrencies over fiat money, it seems that cryptocurrencies are not yet mature enough in their journey to replace the current standard payment method. Indeed, the crypto market will most likely develop alongside the current money system, instead of completely replacing it.

A major difference in these financial vehicles links to volume or supply. Fiat money has an unlimited supply which means central authorities have no cap to the extent in which they can produce money.

With cryptocurrencies, there is a set amount of coins that will ever be in supply – illustrating this is the fact that the total number of Bitcoin coins that will ever be in supply is capped.

With fiat money, it is impossible to tell the amount of money in circulation at any given time, but with cryptocurrencies, it is possible. This, in turn, demonstrates the viability of both systems successfully running alongside each other in future.

Finance

Sunak warns of bill to be paid to tackle Britain’s ‘exposed’ finances – FT

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Sunak warns of bill to be paid to tackle Britain's 'exposed' finances - FT 1

(Reuters) – British finance minister Rishi Sunak will use the budget next week to level with the public over the “enormous strains” in the country’s finances, warning that a bill will have to be paid after further coronavirus support, according to an interview with the Financial Times.

Sunak told the newspaper there was an immediate need to spend more to protect jobs as the UK emerged from COVID-19, but warned that Britain’s finances were now “exposed.”

UK exposure to a rise of one percentage point across all interest rates was 25 billion pounds ($34.83 billion) a year to the government’s cost of servicing its debt, Sunak told FT.

“That (is) why I talk about leveling with people about the public finances (challenges) and our plans to address them,” he said.

The government has already spent more than 280 billion pounds in coronavirus relief and tax cuts this year, and his March 3 budget will likely include a new round of spending to prop up the economy during what he hopes will be the last phase of lockdown.

He is also expected to announce a new mortgage scheme targeted at people with small deposits, the UK’s Treasury announced late on Friday.

Additionally, the government will also announce a new 100 million pound task force to crack-down on COVID-19 fraudsters exploiting government support schemes, it said.

(Reporting by Bhargav Acharya in Bengaluru; Editing by Leslie Adler and Cynthia Osterman)

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Finance

G20 promises no let-up in stimulus, sees tax deal by summer

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G20 promises no let-up in stimulus, sees tax deal by summer 2

By Gavin Jones and Jan Strupczewski

ROME/BRUSSELS (Reuters) – The world’s financial leaders agreed on Friday to maintain expansionary policies to help economies survive the effects of COVID-19, and committed to a more multilateral approach to the twin coronavirus and economic crises.

The Italian presidency of the G20 group of the world’s top economies said the gathering of finance chiefs had pledged to work more closely to accelerate a still fragile and uneven recovery.

“We agreed that any premature withdrawal of fiscal and monetary support should be avoided,” Daniele Franco, Italy’s finance minister, told a news conference after the videolinked meeting held by the G20 finance ministers and central bankers.

The United States is readying $1.9 trillion in fiscal stimulus and the European Union has already put together more than 3 trillion euros ($3.63 trillion) to keep its economies through lockdowns.

But despite the large sums, problems with the global rollout of vaccines and the emergence of new coronavirus variants mean the future path of the recovery remains uncertain.

The G20 is “committed to scaling up international coordination to tackle current global challenges by adopting a stronger multilateral approach and focusing on a set of core priorities,” the Italian presidency said in a statement.

The meeting was the first since Joe Biden – who pledged to rebuild U.S. cooperation in international bodies – U.S. president, and significant progress appeared to have been made on the thorny issue of taxation of multinational companies, particularly web giants like Google, Amazon and Facebook.

U.S. Treasury Secretary Janet Yellen told the G20 Washington had dropped the Trump administration’s proposal to let some companies opt out of new global digital tax rules, raising hopes for an agreement by summer.

“GIANT STEP FORWARD”

The move was hailed as a major breakthrough by Germany’s Finance Minister Olaf Scholz and his French counterpart Bruno Le Maire.

Scholz said Yellen told the G20 officials that Washington also planned to reform U.S. minimum tax regulations in line with an OECD proposal for a global effective minimum tax.

“This is a giant step forward,” Scholz said.

Italy’s Franco said the new U.S. stance should pave the way to an overarching deal on taxation of multinationals at a G20 meeting of finance chiefs in Venice in July.

The G20 also discussed how to help the world’s poorest countries, whose economies are being disproportionately hit by the crisis.

On this front there was broad support for boosting the capital of the International Monetary Fund to help it provide more loans, but no concrete numbers were proposed.

To give itself more firepower, the Fund proposed last year to increase its war chest by $500 billion in the IMF’s own currency called the Special Drawing Rights (SDR), but the idea was blocked by Trump.

“There was no discussion on specific amounts of SDRs,” Franco said, adding that the issue would be looked at again on the basis of a proposal prepared by the IMF for April.

While the IMF sees the U.S. economy returning to pre-crisis levels at the end of this year, it may take Europe until the middle of 2022 to reach that point.

The recovery is fragile elsewhere too. Factory activity in China grew at the slowest pace in five months in January, and in Japan fourth quarter growth slowed from the previous quarter.

Some countries had expressed hopes the G20 may extend a suspension of debt servicing costs for the poorest countries beyond June, but no decision was taken.

The issue will be discussed at the next meeting, Franco said.

(Additional reporting by Andrea Shalal in Washington Michael Nienaber in Berlin and Crispian Balmer in Rome; editing by John Stonestreet)

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Bank of England’s Haldane says inflation “tiger” is prowling

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Bank of England's Haldane says inflation "tiger" is prowling 3

By Andy Bruce and David Milliken

LONDON (Reuters) – Bank of England Chief Economist Andy Haldane warned on Friday that an inflationary “tiger” had woken up and could prove difficult to tame as the economy recovers from the COVID-19 pandemic, potentially requiring the BoE to take action.

In a clear break from other members of the Monetary Policy Committee (MPC) who are more relaxed about the outlook for consumer prices, Haldane called inflation a “tiger (that) has been stirred by the extraordinary events and policy actions of the past 12 months”.

“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely,” Haldane said in a speech published online. “But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”

Haldane’s comments prompted British government bond prices to fall to their lowest level in almost a year and sterling to rise as he warned that investors may not be adequately positioned for the risk of higher inflation or BoE rates.

“There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets,” Haldane said.

He pointed to the BoE’s latest estimate of slack in Britain’s economy, which was much smaller and likely to be less persistent than after the 2008 financial crisis, leaving less room for the economy to grow before generating price pressures.

Haldane also cited a glut of savings built by businesses and households during the pandemic that could be unleashed in the form of higher spending, as well as the government’s extensive fiscal response to the pandemic and other factors.

Disinflationary forces could return if risks from COVID-19 or other sources proved more persistent than expected, he said.

But in Haldane’s judgement, inflation risked overshooting the BoE’s 2% target for a sustained period – in contrast to its official forecasts published early this month that showed only a very small overshoot in 2022 and early 2023.

Haldane’s comments put him at the most hawkish end among the nine members of the MPC.

Deputy Governor Dave Ramsden on Friday said risks to UK inflation were broadly balanced.

“I see inflation expectations – whatever measure you look at – well anchored,” Ramsden said following a speech given online, echoing comments from fellow deputy governor Ben Broadbent on Wednesday.

(Editing by Larry King and John Stonestreet)

 

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