It’s Not So Complicated…
To start with, money has tremendous value as a common basis for trade. Society cannot operate without trade because it allows us all to earn a living by specializing at what we are good at. Without currency that has an agreed upon value, we would all have to work as subsistence farmers with everyone doing the same basic things to survive.
The real question is what form should money take? Lots of people think that currency should be backed by gold so that there is a something with tangible, scarcity value backing our dollars. While this method, which was used for a long time in our country, has many, many merits, there are also real problems with this methodology. Primarily, to make a gold-backed dollar work, the government (or Federal Reserve which is not part of the government) must accumulate large amounts of gold to back the dollar. Also, as our money supply must grow as our economy expands every year, the government would need to accumulate additional gold to accommodate this growth. This is not practical, nor wise, because we don’t want our government trying to accumulate gold (especially by using military means) and there are legit reasons when the government needs to help dig the country out of a recession, depression or by a defensive war by increasing our money supply.
So, for now are we stuck with what is known as “fiat” currency which is actually just a fancy term for the Fed’s ability to print money out of thin air (actually this is done with electronic transactions). This works so long as the Fed is sufficiently responsible in that it only “prints” what the economy really needs such that the “market” (you & me) have confidence that our money supply is being managed appropriately.
However, when the market loses confidence that the Fed is doing a competent job controlling the printing press, then we have a massive problem. People start trading dollars for gold, crypto and real estate (if they can afford it). Also, a dollar weakened by low confidence makes workers want higher pay while companies seek higher prices for their services and goods. Further, our foreign trading partners can become concerned about getting paid in dollars that are not well managed. As the market’s faith in the dollar’s management diminishes, the value of the dollar also diminishes.
So, the simple answer to our question is that the value of fiat currency is directly related to the competency of the Federal Reserve. If they truly have our economy’s best interest in mind, then all is well with the economy’s monetary printing press and the dollar. Of course, government policy also plays an important role in the dollar’s value, but an independent, well-managed Fed can keep politicians from buying votes by keeping a tight rein on the country’s purse book.
Disclaimer of Liability: Although the information in this post has been obtained from sources NBE Media LLC believes to be reliable, NBE does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. NBE Media LLC’s analyses and opinions are not a guarantee of the future performance of the economy nor any industry, company or security. NBE Media LLC disclaims all liability for any misstatements or omissions that occur in the publication of this post. In making this post available, no client, advisory, fiduciary or professional relationship is implied or established. While this post is intended to provide an relevant economic analysis, it cannot be used as a substitute for independent investigations and sound business judgment.
