Fiat Currency: Not All Dollars are Equal

Fiat Currency

The idea behind a fiat currency is that the value of goods and services are against a market rate. Higher demand, mixed with scarcity, produces a position that can be leveraged for more market value. For example, a member of a sporting team produces unique results that inspire fans to attend the game and buy merchandise. This unique advantage by the sporting team member can be used to negotiate for a higher per game fee. Under this framework, the natural assumption would be that all dollars are created equal. Here are several arguments that go against that ideology.

 

Opportunity Cost

The idea of opportunity cost is fairly simple. Once the dollar is, it can not be re-spent. This expenditure means that the opportunities for that dollar are exhausted once spent. So when a piece of equipment is, this is an opportunity cost in that other opportunities become exhausted. The amount of potential opportunities a dollar can be  on is not equal for each dollar holder. That means that someone who has many valuable opportunities will place additional value on each dollar, as each dollar represents a high opportunity cost.

 

Cash flow

Cash flow is the analysis of how much is incoming versus outgoing. A positive cash flow is for both the individual and organization. However, a smaller rate of cash flow presents a higher risk in terms of potential debt. Less movement means lower positive growth in cash. On the opposite, a high rate of cash flow presents a lower debt risk. The ability to go into debt allows for greater possibilities. Therefore, the amount of cash flow presents different opportunities based on speed of replenishment.

 

Hierarchy of needs

Maslow’s hierarchy of needs states that for most people, the most-important expense is survival. This need includes shelter, food, and water. People that are working very hard to meet these primal expenses will not have the same perspective as those who have these needs automatically met. This focus means that the perspective of each dollar shifts as we move up or down our hierarchy of needs. The more primal the need, the greater importance each dollar has.

These three concepts hopefully outline why each dollar is not equal. Dollars can not be re-spent, which leads to opportunity cost. High cash flow leads to additional debt options. Furthermore, a person struggling to simply put food on their table will not be as interested in long term growth. These are several reasons why the idea behind fiat currency is somewhat incorrect.