Forum Post: A question (or two) for the finance and economics pros.
Posted 12 years ago on Dec. 22, 2011, 7:52 p.m. EST by gnomunny
(6819)
from St Louis, MO
This content is user submitted and not an official statement
Now, I consider myself fairly intelligent and I hope my comments on this forum bear that out, but, admittedly, I know next to nothing about economics. So if this question seems silly, understand it's a lack of knowledge, not a lack of intelligence. If our fiat currency is backed by nothing, why does printing more money devalue the bills already in circulation?
Also, do you think our present financial crisis was planned? I see three possible scenarios: either it was planned, it wasn't planned, or it was planned but happened earlier than they anticipated. I'm leaning towards the third. What do you think?
1: Supply and demand. Scarce dollars are worth more. Imagine there were only ten dollars in circulation. Each of those dollars would be worth a lot. Now imagine that the Fed prints a hundred million more dollars and puts them into circulation. Dollars are no longer as scarce, so they have less value. This is the key to how the Fed controls the value of the dollar by controlling the money supply.
2: No.
I'm going to have to get me a good book on economics. If dollars were a commodity I could understand. Consider my point of view: If my employer paid me, say, $10 an hour, and tomorrow the fed printed up a billion more and put them into circulation I would still earn $10 an hour. Conversely, if I paid a dollar for a cup of QuikTrip coffee this morning, that coffee would still be a dollar tomorrow. So, regardless of that extra billion my pay and it's buying power (the coffee) would be the same. What am I missing?
The guy who you're paying for your coffee is going to want more than a dollar tomorrow if billions more dollars are put into circulation today, because dollars are only worth as much to him as he can get for them when he turns around and spends them. The dollar in your pocket doesn't have a fixed value. It's purchasing power is elastic, and it depends on market conditions. The scarcity of either dollars or coffee could affect the price of your coffee.
Now imagine that you have $10,000 to spend on a car. But every day, the Fed takes some money out of circulation. A lot of money. Should you buy a car today? You might be able to afford a used Honda. But tomorrow, dollars will be more scarce and therefore more valuable, and so you'll have more purchasing power. Let's imagine that the Fed takes enough dollars out of circulation that your $10,000 could buy a NEW Hinda tomorrow instead of a used one. Should you buy that car? Not if you know that the deflation will continue. Because two days from now, maybe you could buy a BMW instead of a Honda. But why would you buy the BMW when you could wait a few more days and buy a Ferrari with the same $10,000?
That's called a deflationary spiral, and it illustrates why the Fed doesn't want inflation to drop below zero. It explains why deflation is not the awesome thing that it seems like it would be, because it incentivizes people to avoid spending money. Inflation incentivizes people to get rid of their money while it still has value. Not much of that is obviously a bad thing but so is too little.
Thanks. I definitely think economics should be taught in high school.
In the answer to your second question, no, I don't believe it was planned. Most economists could have told you it was coming though, because of the expansionary monetary policy put into action by the Federal Reserve, which caused the interest rate to fall, causing more people to buy houses who couldn't afford them. When the interest rate eventually rose again, because of contractionary monetary policy set in place to prevent inflation, many people who had taken out loans could no longer afford them. This caused the housing market to collapse, which was the basis for this whole crisis.
Many saw the housing crisis coming five years before, I heard many on talk radio say it was coming.
if it could be foreseen, then to still advance in that direction could be nothing except on purpose. you do not accidentally walk off a cliff you see 100 ft in front of you.
Thanks for the reply. What's your opinion on the belief that many world leaders and members of the 'elite' are pushing for a one-world government and global currency? Many people believe that crashing the US dollar is in fact part of the plan for instituting this global currency.
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Thanks, I will. I assume it will help answer my question, correct?
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