Major global currencies, such as the USD, EUR or formerly also RUB, are being managed by respective central banks. Central banks are the authorities that control the amount, interest rates and markets. Central bankers have to manage these currencies so that they support the global stability and growth.
Fiat currencies and rumours of failing system
However due to the recent events, starting with the global pandemic and escalating with the war in Ukraine, things got out of their hands and rumours are starting to spread that the fiat system is failing.
Fiat currencies and trust
This is often someting that the cryptocurrencies are being degraded for. That there is no “intrinsic value” behind them and that they are based solely upon the trust tof their investors. However fiat currencies nowadays are also backed only by the trust of their users. There is no gold or other reserves that these fiat currencies are linked to.
Fiat currencies and inflation
Inflation, or else the fact that you can buy less and less for the money in your wallet, is in fact a gradual loss of trust. The higher the inflation, the lower the trust of the people in the fiat currency.
Fiat currencies and Bitcoin
The emergence of digital currencies was a direct response to the loss of trust in fiat currencies, follwed by the latest financial crisis from the years 2007 – 2008. Bitcoin was a direct response to the situation, when it introduced means of transactions without the need to use the fiat system. People liked the idea so much that now there are more than 15 000 digital currencies that are more or less succesfull.
Fiat currencies and global reserve currency
Now enter the USD as the global reserve currency, as it is USD, which was used by most countries to settle transactions for oil and other natural reserves, business and trade. As a direct result of the global sanctions against Russia, Russia is now attempting to install a new reserve currency, its own. According to some economists, the impact of the sanctions could lead to the USD ceasing to serve as the global transaction currency.
Fiat currencies and new hard money
Sanctions against Russia combined with its relationship with China and a crisis in some commodities are threatening the dollar’s reserve status. This could bring about a situation, where the need to settle transactions for commodities may repave the road to a new form of the so called hard money. This money could be digital, issued by the central banks directly, such as it is already been happening in China with their digital yuan.
There are several factors, unheard of in the history of the fiat monetary system, that could lead the very end of this system or to its significant transformation. The only question remaining is what will replace this system and are you ready for it?
For more information on this topic, see What you need to know about monetary system – History and Present.