Thread by @VaradMarkets

#Dollar = '#Fiat' Money?

Article rightly highlights QE just as asset swap & that Money is created by Bank lending, not Fed, it also revives interesting debate arguing Dollar not Fiat but Credit money

What exactly is Fiat/Paper money? Two definitions:
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ft.com/content/5e5b2a…

'Fiat' Money:
1⃣ Into existence because of authoritative decree/sanction/order; no Intrinsic value
2⃣ Not convertible to or backed by other asset or commodity (Nixon Gold Std 1971; Britain 1931)

1⃣ Decree:
Dollars/Money = IOU 'I owe you' from Central Bank CB to Economy =

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=Liability of CB=>‘Credit’ Money
But Dollar/Money = special IOU that everyone in Economy trusts. So yes, we take credit risk on US Govt when we trust Dollar=>‘Credit’ Money

But while there may not be an authoritative decree behind Dollar (so not ‘Fiat’ from that angle)...

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it is Govt authority which brings that trust in the first place, which makes Dollar universally accepted as medium of exchange

So it is NOT:
Authority => Decree/Order => Dollar/Money

BUT it is:
Authority => Trust => Dollar/Money

This Trust is where credit risk creeps in

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2⃣ Convertibility:
Arguments for Dollar not being Fiat using second definition are a bit hazy

If you lose faith in US Govt, can you convert your financial asset (Money/Dollar) into another non-fin goods/commodity. No

Article seems to suggest that we should be fine as...

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...this CB liability (Money/Dollars) is ultimately backed by assets "It’s all transactions on balance sheet, assets for liabilities"

But note that CB liability (Dollars) is backed by Assets (UST/Debt) which are also denominated in same Dollars
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CB can pay back its liability/debt only with more fiat money. You can get your old $100 bill replaced at bank with new $100 bill – but both are still Dollars

Hence:
🔹 Authoritative Decree angle: Dollar not 'Fiat' but 'Credit/Trust' Money
🔹 Convertibility angle: Dollar is Fiat