# Dawid Ciężarkiewicz aka dpc

## Why Fiat Money is not worthless

Anytime there's a thread about Bitcoin on HN or elsewhere and people start talking about money, Bitcoin, crypto, economic and such, it becomes pretty clear that pretty much no one there has any clue what they are talking about.

One talking point that irritates me most in these discussions is that both sides (pro and anti crypto) are wrong about “why does fiat money have some / does not have any value”. The pro-crypto side says “fiat money has no value / is not backed by anything” and the anti-crypto side says “fiat money is backed by the fact that you have to pay taxes with it / government has guns”.

Both statements are nonsense. The simple truth is: modern “fiat money” is backed by the loans created when it was created.

When someone takes a mortgage (or any other loan) in a commercial bank, the bank creates the money it gives to the borrower from a thin air (kind of), however, importantly, a loan asset is created that is an obligation of that created money being paid back with an interest. As the loan is being paid back, both the original amount of money and loan asset cancel each other out and both disappear.

This simply means that for every dollar in existence there is someone who created it by taking a loan and is now very motivated to get it the near future to pay the debt back. A person (or institution) that is willing to trade their time, skills, health, and whatever else they might have just to e.g. not lose their house. There's a whole army of individuals and institutions that have a lot to offer for exchange of that fiat dollar if you happen to have one. And that is what gives the dollar its value.

BTW. If you're curious, pretty much since “the financial crisis” in 2008, I've been continuously in my free time learning about money, economy, monetary system, and so on. I've gone through all sorts of phases, camps, ideas. I've watched countless youtube videos and read many books. My understanding of things changed many times.

My current understanding is that the modern fractional-reserve “fiat money” monetary system is (in a way) a really brilliant idea. The elasticity of money it provides improves economic activity and was one of the reasons why the last century was a time of tremendous economic growth. On its own that system is not a scam or a Ponzi, etc. as some people claim and could potentially work forever, but it has at least one fatal flaw: once the amount of money (and thus simultaneously loans backing it) in the system is too large, it's politically impossible to have the governments and the public ever pay it back or admit it's impossible and write down the losses. The amount of fiat money and thus the debt backing it must always grow.

Right now we live in the very weird times where we've stretched that elastic rubber so far, that the whole system: the rich, the poor, the private sector, and the public sector, all countries try really, really hard to pretend that all these trillions of loans backing all the money that was created are actually worth what they are claiming to be and it's possible to pay them back in a meaningful way. But it isn't. The FED (which is effectively a central bank for almost whole world) can't ever meaningfully increase interest rates without collapsing the economy. Even more – as the interests rates are effectively 0% already, it needs to somehow encourage new money (loans) being created, despite the whole system being loaded with it: both loans and fiat money.

If you're looking for some good sources to expand your ideas in this are, I recommend:

• YT videos of Steve Keen, in particular about Minsky (modeling tool he developed) like this one
• Lombard Street – A Description of the Money Market a book from 1880s which really enlightened me on how money used to work, which explains a lot why are we on the fractional reserve system now
• Jeff Snider videos on YT – from all the people I've listened to his mental model of the financial system is just the best, IMO.