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Thread: Some Candide thoughts on fiat currency. 
I came across this meme recently. I have no idea if Voltaire actually said this, but it doesn't matter. Many people can see the wisdom here. And, you know, Weimar, Zimbabwe, Venezuela, etc., ...
But there's considerable evidence against the sentiment too. Just take a look at how U.S. currency in circulation has grown over the years. (Currency in circulation = physical notes in hands of non-bank public).
What's interesting about currency is that the quantity of it in circulation is not determined (directly) by the Fed. The Fed creates new money in the form of interest-bearing reserves, which can only be removed from the banking system when they are withdrawn as cash by people.
So it's depositors like you and me who decide how much of our bank deposits to hold in the form of cash. In other words, currency in circulation is determined by the *demand* for cash.
But if so, then why is the demand for this intrinsically worthless paper growing so rapidly? What would Voltaire say? (He'd probably say just wait--if we wait long enough, any prediction will come true, after all.)
Maybe people want to hold more cash to keep up the rising cost of living. Sure, except that cash demand is rising faster than the CPI price-level...
The demand for cash has also been growing relative to the size of the economy since the 1990s (the broad pattern here is roughly the mirror image of the secular rise and fall of the nominal interest rate).
In any case, point is that the demand for this stuff does not seem to be waning the way one might expect if the product was truly intrinsically worthless. People should be shorting the stuff...hot potato effect...etc. Why is this not happening? Maybe Voltaire was wrong?🤔
