What is fiat currency?
Fiat currency is government-issued currency that is not backed by a physical commodity, like gold or silver, but by the government that issued it. Fiat currency’s value comes from the issuing government’s reputation: fulfilling debt obligations, stability, openness to trade, or trade (im)balances.
The word “fiat” comes from Latin and means “it shall be” or “let it be done”. By fiat, the Chinese and United States governments decree that a particular amount of yuan or dollars can purchase a certain amount of goods or services.
Fiat currency gives national central banks greater control over their debts and economies because they can control how much money is printed. In the past and present (and probable future) national governments have used their power to increase or decrease the value of their currencies.
Nominal value is measured in terms of money, whereas real value is measured against goods or services. One could say that while national governments choose to avoid nominal defaults, they many times default in real terms. For those of you interested in a deep dive on this, I’d suggest the following papers: