Ever since the 1930’s when Britain abandoned the Gold Standard, world currencies have drifted toward Fiat money. Fiat money is a government-issued currency that is backed by the trust in the government that issued it, rather than a physical commodity.
It used to be that if a central government wanted to add more money into circulation, they had to back that with an equal value of a commodity. Under the Gold Standard, if the United States, for example, set the value of gold at $1,000 an ounce, then the real value of a dollar would be 1/1000th of an ounce of gold.
All that changed with the move toward Fiat currencies. The value of a dollar is basically whatever trust you have in the United States government.
The Fiat system’s flaws were highlighted in the recent remarks made by the European Central Bank (ECB) president, Christine Lagarde, who commented that the ECB could never go bankrupt, regardless of any losses it might incur. It turns out standard bankruptcy rules don’t apply to central banks, since as the issuers of central bank money, more liquidity can be generated as needed. What that boils down to is printing money.
Lagarde argued that central banks and, in particular, the European Central Bank are not restricted by any of the norms binding other financial institutions.
The remarks came as Mrs. Lagarde fielded questions in the European Parliament. The ECB has pumped trillions of Euros into the Eurozone economies to battle the effects of the Covid-19 pandemic, prompting some MEPs to question the ECB’s health.
The fear is that the ECB has overextended itself with the enormous amount of currency put into circulation and the level of Eurozone government debt it took on as part of the recovery measures put in place.
However, Mrs. Lagarde reiterated her position that as the sole issuer of Euros, the ECB was immune to bankruptcy.
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