What is money? Part 3

So to sum up what I’ve written  so far in Part 1 and Part 2:

1. The value of something is determined by what someone is willing trade for it.

2. Money is a medium of exchange, and as such it only works if people think it’s worth something.

3. Money is valuable because the government says it is, but

4. The more money that’s available in circulation, the less valuable it is.

So now let’s close the loop on that last one. Money isn’t backed by anything solid or valuable. It’s only backed by the promise of the government that issues it to be responsible with it. If the government allows too much of it to be created, the value of the money relative to the amount of goods declines. Also, if the government itself becomes unstable or appears to be irresponsible, or reaches a point where it appears to be unable to support its debt, the value of that money will decline. People will want less of something if they’re uncertain that its going to be as valuable tomorrow as it is today.

So that’s how we get exchange rates. If your country is politically stable, responsible with the amount of money it creates, and responsible with its debt load, foreigners with less stable currency will want to hold your currency instead. People have liked the dollar more than other currencies for a long time because of America’s political stability, military strength, vast industrial base, prospects for growth, etc.

There’s been talk through the years of creating a new world currency backed by oil, but that petro-currency would be backed by a lot of goofy countries with goofy leaders and populations that are dominated by a goofy religion that encourages self-detonation and Jew-killing when things aren’t going right. That’s a little too much uncertainty for people who don’t want to risk their money. Similarly, up until recently with the introduction of the Euro, no single European currency was very attractive, what with the European tendency to reduce its infrastructure to rubble and population to corpses every few decades.

By comparison, the dollar looked pretty sweet.

But now, for many reasons (most of them self-inflicted) the dollar is weakening relative to other currencies. China and India have emerged as real economic players. American deficits are skyrocketing, and we’re making money out of nothing to pay for them. Our industrial base is moving off-shore. We seem to be intent on expanding the welfare state, further burdening the producers while increasing benefits for non-producers. Our economic health now rests not with ourselves, but in the hands of a couple of Asian countries who have been willing to buy our government’s debt since we’re addicted to spending more than we earn, but who are now not so sure they want to keep buying and holding quite so much.

So things aren’t quite as rosy as they used to be.