Fiat currency does not actually have the backing of a government. What could the UK do when the pound peg broke? Nothing but lose enormous amounts of money trying to hold it.
The government doesn’t give it a baseline value, it just has the power to force people to use the national currency when doing business involving legal affairs and the like (which may help bring up its value). Even then, I know of 3rd world countries that prefer the US dollar for all day to day (peer to peer) transactions even when the local government has their own currency established.
What scenario involves the UK losing an enormous amount of money would be one where they are attempting to "hold a peg"?
I'm confused. Countries manipulate their currency supply in various ways in order to make their money cheaper or more expensive, I get that. But I thought the main goal was to keep exports or imports to a good balance to avoid wrecking a real economy. Like, actual people's lifestyles and jobs and well-being, beyond just the value of an investment instrument
I'm not sure I see the metaphor holding up here, isn't the issue that came up an arbitrage opportunity caused by a peg that in the real world doesn't really exist or which is easy for actual human beings to intervene in?
Are you describing what Russia did? Did they "lose money" with the actions they actually took? It seemed more about adding rules and changing contracts than by spending money on anything in particular, I'm not sure how one would calculate how much money they lost doing it. Or if that's a useful way to think about it really even, nations just have so many other priorities and their money policy is not at all algorithmic...
So it sounds like this "ERM" is algorithmic enough that it broke things. It did get stopped due to human intervention though, so it feels like a weak metaphor.
I hope international currency markets aren't quite so fast... hopefully we won't find out.
The very concept of a currency peg is that you sell things in exchange for the currency when it is not valued highly enough, and buy things in exchange for it when it is valued too highly. It wasn't the implementation that is algorithmic, it was the idea of a pegged currency itself that made Black Wednesday inevitable.
If a national government can't maintain the value of their currency, they aren't backing it, and if they have so much gold that they can maintain the peg no matter what happens, it isn't fiat (the gold standard is where the government will sell and buy gold at a fixed price, printing or destroying currency in the process). So I would conclude that fiat currencies aren't backed by anything.
Well pegs are stupid ideas. Just let the interest rate "float" into the negative range. That way your currency will remain stable while every other country inflated their currency to represent the same negative yield.
It could leave the Exchange Rate Mechanism which created the conditions for the run. And it did. Fiat currency always has the backing of a government, as 'fiat' suggests.
