Question

Provide two reasons why you think the gold standard or the fiat system (our current system in the U.S.) would be better or worse for the future of the U.S. and/or the global economy. Next describe how you believe the current pandemic crisis could affect the International Monetary System and/or International Monetary Fund?

Answer 1

Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies. The two reasons fiat money can prove worse for the US economy are:

• Although fiat money is viewed as a more stable currency that can cushion against recessions, the global financial crisis that evolved substantially proved otherwise. Even though the Federal Reserve controls the money supply, it was not able to prevent the crisis from happening. Underlying the uncertainty related to the governments.The mortgage crisis of 2007 and subsequent financial meltdown, however, tempered the belief that central banks could necessarily prevent depressions or serious recessions by regulating the money supply. A currency tied to gold, for example, is generally more stable than fiat money because of the limited supply of gold. There are more opportunities for the creation of bubbles with fiat money due to its unlimited supply.
• Today, with inflation unusually low and stable, the gold standard is a tougher sell than it once was. But as trust in American institutions wanes, there is renewed support for money backed by something tangible, not the say-so of the government. If inflation picks up once again, a solid base of gold standard evangelists is ready to take it mainstream. It would rein in inflation and take the country back to an era of financial stability, by barring the government from putting new paper money in circulation unless an equal amount of gold is mined.

Effect of current pandemic crisis on the International Monetary System and/or International Monetary Fund

Global growth is projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.

The International Monetary Fund is playing a central role in supporting the countries amid crisis, acting as a “financial firefighter" IMF-supported programs in the near term focus primarily on stabilizing the economy. This includes establishing spending priorities (for example on health and other social spending, as well as liquidity and income support to the most affected firms and households). The unprecedented uncertainty brought on by the pandemic means it has become more difficult to plan economic policies, and targets risk quickly becoming obsolete.This trend is likely to continue for the duration of the pandemic until a firmer view on the economic outlook and financing conditions can be established. The IMF will need to enhance collaboration with other international financial institutions to implement structural policies. These would include health, debt management, and social protection, improved governance in lending, as well as steps to improve resilience to future health and climate risks. The IMF is responding to requests for emergency assistance from more than 80 countries and has made available two emergency funding streams. First, up to $50 billion of rapid-disbursement funding is available for LMICs, which need not have an existing full-fledged IMF programme.Second, countries can apply for catastrophe containment and relief trust support, designed to assist with pandemics; this fund has about $400 million available thus far and might increase further. By early April, only four countries had received support from either instrument, and the IMF's principal response has been more of the same: urging crisis-stricken countries to apply for conventional loans, albeit with greater flexibility in funding—up to $1 trillion is reportedly available. These loans are subject to controversial conditionalities—reforms that must be introduced before money is disbursed. Such conditionalities have adverse effects on population health because they include ill-designed policy measures such as budget cuts, reducing the number and wages of health and social workers, weakening workforce protections, or promoting privatisations.

These efforts and initiatives of the International Monetary Fund in the current crisis will ultimately affect the overall fiscal and monetory reserves and will ultimately result in lesser intensity of assistance from the institution.