Fiat monetary system

Explain to me how the increase in the amount of paper pieces can make a society richer. If that is the case, why is there still poverty in the world? — Hans-Hermann Hoppe.

A fiat monetary system is controlled through a Central Bank by a state or a group of states. 

A Central Bank has the monopoly over the creation of fiat units, both in physical form (notes & coins) and 

in digital form (commercial banks reserves at the Central Bank). 

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Those units are considered issued once they have been allocated.

The plan for allocating them is called monetary policy. It is usually justified under the intention of providing monetary stability and financial stability, although the FED has the additional mandate of achieving maximum employment

Central Banks view monetary stability as a constant "consumer price" inflation and as a non-volatile exchange rate against the main other fiat currencies. 

In order to pursue it, the Central Bank continuously expropriates value from fiat balances, which destroys the ability for money to store value in long-term.  

Financial stability means that the Central Bank will rescue bankrupted financial entities that are considered “too-big-to-fail” or “too-connected-to-fail”,  which incentives those entities to incur in bigger risks and to disguise capital consumption as profits.

Central Banks' receipt to reduce unemployment in short-term by "stimulating" the economy, is to distort the functions of money through an unexpectedly high rate of monetary inflation.

In reality, monetary inflation "intoxicates" the economy "enslaving" people:

-The Store of Value function is distorted by redistributing value saved in fiat money to the Central Bank. This way, the easiest way for people to accumulate value disappears. 

If the stored value rots, working forever becomes a necessity. 

-The Medium of Exchange function is distorted because exchange rates between goods and money (aka prices) don't adapt instantly nor uniformly to the new amount of fiat units. 

Goods' providers have an inertia to continue offering their services at the same prices, ignoring that monetary units are more abundant than expected; so they end up obtaining less value for their labour. This mechanism is often referred as Cantillon effect. 

-The Unit of Account function is distorted because the monetary cake is splitted up in more pieces, so each fiat unit constitutes a smaller portion of the monetary system. It is an accounting trick that benefits borrowers and harms lenders.

It tends to temporarily increase the profit of businesses whose capital is intensive on labour at the expense of harming workers with already established contracts because fiat obligations are partially "forgiven".

Nevertheless, despite all those advertised mandates, whenever states accumulate big deficits, Central Banks' first priority becomes to cover those deficits with new printed fiat units.

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When circumstances are "convencional", monetary policy implementation follow the next process: 

1st. Announcement of interest rate policy: the Central Bank makes public its target figure for the interest rate that commercial banks charge each other overnight for lending reserves (Federal funds rate, LIBOR, etc.). Other market participants will tend to led rates to that figure anticipating the Central Bank move; if not, the Central Bank can always step in through open market operations.

2nd. Open market operations: the Central Bank prints units to purchase government securities in the Money Market (the market for short-term government debt), which influences overnight interest rate. Purchases are done through outright transactions and repo transactions.

3rd. Standing facilities or Discount window: the Central Bank establishes a lending facility just in case any bank finds difficulties borrowing. It is usually charged the interest rate announced plus a small premium.

It is also common for the Central Bank to negotiate other financial assets (like gold, bonds from other countries, and foreign currencies) to intervene in the exchange rate or to prepare for it.

"Non-conventional" monetary policy implementations that have been used lately are Quantitative Easing, Credit Easing and Stimulus Checks Programs.

Quantitative Easing is the purchasing of long-maturity government securities. 

Credit Easing consists in the purchasing of private sector securities.

The Stimulus Checks Programs are sometimes refereed as "helicopter money" and they consist in the direct allocation of new fiat units to people.

The interest that the Central Bank's assets generate, is remitted to the government.

The economy tends to adapt and to restructure itself in order to capture the new stream of money originated at the Central Bank.