Monday, January 9, 2012
The Balance of Assets & Liabilities for Irredeemable Fiat Currencies:
The more technical reason for this dynamic is that irredeemable fiat currencies trade at perennial discounts from imagined would-be ‘pars’. Before the early 1970s there was at least some vague attempt at maintaining redemption at some specific ‘par value’. This meant that if the market were to doubt the integrity of a currency issuer then that currency would fall to a ‘discount from par’. This would invite either a correcting drain on reserves (due to redemptions at par value), an outright debasement (more snidely referred to as a ‘revaluation’) or some kind of intervention to forestall the inevitable. But since there is no clearly identifiable promised ‘par’ at present we have a scenario where currencies trade at perennial discounts to the value that would be par if redemption were to resume with immediate effect.
The above characterizes the fact that fiat currencies are promises for maybe something (but probably nothing) at perhaps some time in the future (but probably never). In this way, the dollar-backed fiat currency represents a doubly precarious asset – for it’s a promise for maybe something maybe later (but probably nothing, never) for maybe something different at perhaps some later date (but probably nothing, never)!
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