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Monday 12 April 2010, 18:29 WIB

Fiat Money and the Threat of Economic Stability

- Detik news

Fiat Money and the Threat of Economic Stability

Jakarta - The issue of using fiat money as an unstable currency is undeniable. Fiat money, better known as banknotes, has actually provided "shares" to the economic instability of a country and even the world continuously and is destructive. The fundamental reason for fiat money instability is because naturally it is not stable.

This is because fiat is unbacked money which is forced to be used because of legal protection and "coercion" from the state. As a consequence, the state has a role and responsibility in maintaining the availability of its supply so that it can meet the existing demand.

Indirectly this gives an indication that fiat money's stability depends on how strong and to what extent a country is able to maintain its economy strongly and withstand various shocks both internally and externally.

Unfortunately, the state cannot always guarantee fiat stability because it is indeed an unstable character. Therefore the central bank wherever it is formed has the sole purpose (main). To maintain price stability (inflation) and exchange rate stability.

Why Stability <\ / strong>

Every economy always craves conditions where full employment conditions can be achieved. In economic theory this condition is illustrated by conditions where the unemployment rate can be kept to a minimum as possible accompanied by a normal inflation rate. Thus monetary and fiscal policies which are representations of economic policies are actually directed so that the economy can provide welfare and improve human living standards. Not the opposite.

However, why do these two policies always give negative results to the economy? Suppose the government issues a fiscal deficit policy in order to stimulate an economy that is undergoing a recession, as in the global case of the 2007 crisis where the Indonesian government issued bailout funds to Rp 7.2 billion for reasons of economic rescue.

However, the effect of the policy is not to provide a significant increase in output and to impress high economic costs. Based on data from the International Financial Statistics (IFS) 2009, it was noted that the stimulus policy only increased national output by 6% and had raised interest rates by 35% (calculations between 2007-2008).

Logically, how could the real sector be excited if faced with such an interest rate? Thus it is reasonable if there is an assumption that 6% percent is not due to the development of the real sector. However, due to soaring financial sector activities. Again money is an issue supporting the development of a financial sector that is so great.

Then, how can economic stability be raised if every economic policy always gives the impression of instability? And, the conclusion of the results suggests that money is the main trigger for anomalies in every economic policy.

Character of Money (Fiat Money) <\ / strong>

Fiat money which is nothing but paper money and we always use it is actually a state debt to everyone who holds it. It's worthless and real always fluctuates following market turmoil. In various economic theories have been mentioned and proven that money in the long run is inflationary and unstable.

Furthermore, money will have a negative impact on output in the economy. Besides that money is very closely related to interest rate fluctuations where the upheaval at the interest rate will change the balance of money in the economy. The interest rate will have an impact on the current decline in the value of money compared to the future. So, indirectly by holding money, we have paid taxes to the state and in real terms our wealth will be reduced because of it.

That is why many people are competing to invest their money in non-financial economic assets just to save the value of their assets from reduced value and degraded by inflation. Thus the widespread use of fiat money has had a negative impact. Both in terms of macro economy and individually.

Then, how? <\ / strong>

Considering that fiat money has been used extensively and rooted in all economic sectors, it is not wise and appropriate if we reject and suppress its existence. What can be done in addressing the negative side of fiat is by reducing the side of instability by encouraging users