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No, actually a currency is not backed by a nations assets. It is backed by the obligation to pay your taxes in that currency. I.e. every citizen with tax oblig
by menotyou 8y ago
No, actually a currency is not backed by a nations assets.
It is backed by the obligation to pay your taxes in that currency. I.e. every citizen with tax obligation (i.e. basically everybody) needs to collect Dollars to pay his tax bill. So everybody is willing to accept payments in that currency or in a currency which can be reasonably easy converted to Dollars.
As a topper sales tax creates a tax obligation on virtually all transactions within the society, so the need to own Dollars is directly bound to economic activity.
- bmh_ca 8y ago> It is backed by the obligation to pay your taxes in that currency. If it's a reserve currency, as the U.S. is, it is also backed by the demand of other states to hold U.S. dollars to stabilize their non-reserve currency. Indeed, some argue that a reserve currency is not subject to ordinary balance of payments criteria. This is sometimes called exorbitant privilege.[1] All to say, the U.S. currency is not just backed by assets of the nation, but by demand that other states have for local-currency stability. Somewhat aside, some argue that this creates a perverted incentive to destabilize the world because unstable states and regions have a higher demand for a reserve currency. [1] https://en.wikipedia.org/wiki/Exorbitant_privilege https://en.wikipedia.org/wiki/Exorbitant_privilege