Money, concern about inflation?

Currency/money, I am sorta just use them for granted just like many other people. Not until recently I came to some better understanding of these terms and concepts such as: Fiat money, inflation, central banking, gold and silver standard…

“Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress-- yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat currency.”
http://www.ronpaullibrary.org/document.php?id=537

Inflation is a fact of life. It was even when money was fixed to the gold standard -- since people kept mining for gold, the supply of potential money kept growing too. It's even more so nowadays that money has become very much an abstraction -- a set of bits stored by a bank, basically.

As to inflation, yes, it is something you should be aware of. We live in a globalized economy, where a crisis in one area can have major and unpredictable effects in other areas, especially since transactions can happen in real time, simply by shifting bits from one bank to another. One effect can be sudden changes in currency value.

Take the value of the US dollar. It's been depreciating steadily against the euro, pound, and yen for a while now; in fact it's lost nearly half its value against the euro compared to the highest point it had. The reason is pretty simple: America is running a pretty damn huge "triple deficit" -- trade, budget, and investment. Essentially, it's buying foreign goods by printing money. That sort of thing can't go on forever.

The worst-case scenario is an Argentina-style meltdown, characterized by mass unemployment and hyperinflation (i.e., the currency losing virtually all of its value within a few weeks). This could happen following a cascade of bad things happening at a bad time. I kinda doubt we'll see that with the US dollar, but some pretty respected economists refuse to rule it out either.

In any case, I have a pretty strong feeling we're heading into another economic recession. One's due about now. How deep it will turn out to be, I don't know.

What does it mean to you personally? That depends entirely on your economic situation. The worst place to be when something like that happens is between two houses -- you've just bought a new one but haven't managed to sell the old one, when all of a sudden the value of both houses falls through the floor as your interest payments go through the roof. That's personal bankruptcy time. The best place to be is having a solid, unexciting job in a solid, unexciting industry, with a reasonable but not overwhelming debt burden. You'll probably keep your job allowing you to keep up payments, as inflation will shrink your debt, and once the recession ends, you'll come out smelling like a rose.

Thanks to your input, I am learning as much as I can about this issue. Just talked with a co-worker of Mexican native, who informed me that the new Peso has dropped to 11 Peso to 1 $ since its inception in 1994 (3 Peso to 1 $), and Mexicans prefer saving in dollars. Just wait till they know what the dollar is doing!

Housing is hot in the financial news here in the States, I read that the current SubPrime housing bubble has great impact on global ecoonmic, as a German bank losing billions of euro investment and not to mention thousands of people losing their homes and owe thousands of dollars. This #&@*ing varible interest rate policy was supposed to help less affluent people to purchase their home. It is a scam through and through.

Seems hard to have a inflation-proof currency as the price and value of every commodity flutuates. However Fiat money is only worth the ink and paper, the inflation potential is almost limitless as comparing to commodity-base currencies. Someone raised an interesting example, in early 1900 a silver Morgan dollar(90% silver, 26.7g) gets you 4 gallons of gas, and today an once of silver($13, 31.3g) will also get you 4 gallons of gas. That's an astounding revelation in how commodity base currency can maintain its value. Fiat money has loop holes built-in for exproitaion, I think it is crazy to allow it to continue.
Here is a link to some more info about old gold standard, maybe new gold standard
http://news.goldseek.com/bullnotbull/1182956520.php

Yah. I wonder which bright light thought it was a great business idea to lend money to people who are unlikely to be able to pay it back...?

I very much doubt we'll go back to a commodity standard currency, despite the advantages. We're just going to have to live with the volatility associated with fiat currencies. Basically, commodity standard currencies always sound like a great idea during an economic downturn, but they become a bad idea during an upturn.

The gold standard is like a built-in speed limiter on a car -- if you feel that the driver will kill somebody if they go past 60 mph, you should install one -- but then not be surprised if a better driver zips past them at 80 because they don't have the limiter.

Here, we control inflation by increasing the prime interest rate everytime inflation is in danger of going up!! It's not very popular with anyone except the economic bean counters!! Fortunately I don't have a mortgage, but a volatile stockmarket affects me since all my superannuation is invested in it!!

People tend to invest and hoard (so to say ) in strong currencies - and what's stronger than precious, rare materials (like Gold and Platinum, for example) ?

Currently, the Euro is quite strong. I believe that this might have some effects - for Europeans, for example, buying stuff in the U.S. is now a bit cheaper.

Alrik Fassbauer said:

Currently, the Euro is quite strong. I believe that this might have some effects - for Europeans, for example, buying stuff in the U.S. is now a bit cheaper.

Click to expand...

Yeah, but there are also things like importcharges and sometimes it can not even be bought here. For example an PS3 costs 600$ in the USA, but it costs also €600 here in Belgium. Compagnies simply ask more revenue.

@Prime Junta, Speed limiter as an analogy has a little bit of appealing to vanity IMO, Fiat money/FED is a superbus without upper speed limit, the driver's temptation is to drive it as fast as he can in the absence of police patrol. Unfortunately, there are hazardous oil spills such as Subprime mortage, prolonged wars along this once-use highway. You can imagine what happen if it spins out of control, and there are no airbags for the passangers except the driver.

this article about subprime today
"The near zero liquidity of these highly leveraged funds has resulted in margin calls, panic, and some of these funds being forced to sell positions in other sectors of the market. But, this crisis is near over. The Fed has come to the "rescue." Just today it has pumped $19 billion in new reserves into the banking system by buying mortgage securities. My rough calculation suggests that over the last two days the Federal Reserve has pumped in enough new reserves to increase the money supply by somewhere between 10% and 15%"
http://www.lewrockwell.com/orig8/wallach1.html

mudsling3 said:

@Prime Junta, Speed limiter as an analogy has a little bit of appealing to vanity IMO, Fiat money/FED is a superbus without upper speed limit, the driver's temptation is to drive it as fast as he can in the absence of police patrol. Unfortunately, there are hazardous oil spills such as Subprime mortage, prolonged wars along this once-use highway. You can imagine what happen if it spins out of control, and there are no airbags for the passangers except the driver.

Click to expand...

That's true, but still, consider how gold prices react to market conditions. When the market goes down, gold goes up as investors shift money into low-risk, low-return stuff. When the market goes up, investors shift money into high-risk, high-return stuff, and gold goes down.

So, if the dollar was a gold standard currency, it would be worth more than twice as much now than it was in 2001 -- IOW, it would be ridiculously low in 2001, and ridiculously high now. Neither of these things would be good for the national economy.

Basically, the gold standard is no substitute for sound economic policy. It just makes it a bit more difficult to have a disastrously bad one. What's more, it's not foolproof -- when down to the wire, there's always the temptation to debase the currency. I'm quite sure that the pressure to do just that would have been pretty huge when gold was going at $250 an ounce!

this article about subprime today
"The near zero liquidity of these highly leveraged funds has resulted in margin calls, panic, and some of these funds being forced to sell positions in other sectors of the market. But, this crisis is near over. The Fed has come to the "rescue." Just today it has pumped $19 billion in new reserves into the banking system by buying mortgage securities. My rough calculation suggests that over the last two days the Federal Reserve has pumped in enough new reserves to increase the money supply by somewhere between 10% and 15%"
http://www.lewrockwell.com/orig8/wallach1.html

Click to expand...

Which, of course, will further weaken the dollar.

The problem is that due to the Bush administration's disastrously bad economic policies, the Fed is caught between a rock and a hard place. The dollar is looking very wobbly to start with, so pumping more into the market will weaken it further, which reduces the purchasing power of the American economy, which risks slowing growth and a recession; not pumping more into the market risks a liquidity crisis and a recession. If the dollar was on a sounder basis to start with, injecting dollars into the economy could actually stave off a liquidity crisis while having only a minor effect on the value of the currency. But it's not, so things aren't looking good.

The problem is, when America sneezes, the rest of the world catches the flu!!

Corwin said:

The problem is, when America sneezes, the rest of the world catches the flu!!

Click to expand...

That is the thing ... I don't disagree with PJ's reasoning, but he does have a strong anti-American bias that shows through on all of his posts, which seems to cloud the reality that US downturn = world recession, whereas other markets faltering, even huge ones like Japan, have only limited global reach.

Of course, the real answer is to get some sound economic policy in the US.

@txa -- I could counter that by pointing out that you have a strong pro-American bias, which seems to cloud the reality that the US economy is no longer the dominant one in the world. The EU economy is bigger, the East Asian one has reached the same scale as the EU and the US, and the Russian one is much more robust than during the last recession. Moreover, the status of the dollar as the world's reserve currency has already been eroded by the euro. All of this will soften the impact of a US recession on the global market.

Second, I do feel that a global recession is a price worth paying if it means the US dollar will completely lose its status as the world's reserve currency, which would reduce American economic and political power to a more reasonable level. The current system is seriously out of balance, and the longer it goes on without a correction, the harder the fall will be when it happens. I'd rather get it over with sooner than later.

But no, it won't be pretty, and yes, the effects will reverberate all around the world for sure, even to the point of a global recession.

Prime Junta said:

I'd rather get it over with sooner than later.

Click to expand...

Very true - I think that the antagonistic interdependence in the world vis-a-vis the US is not a good thing (i.e. we HATE you ... now please send a check) ... the reality of the world has shifted and I cannot stand the way in which the current administration seems to have adopted the line put forth in many video games and trashy scifi books and movies that our power can only exist when faced with a massive enemy ...

txa1265 said:

Very true - I think that the antagonistic interdependence in the world vis-a-vis the US is not a good thing (i.e. we HATE you ... now please send a check) ...

Click to expand...

I'm curious... which speaker do you think has which line? Both, perhaps?

Prime Junta said:

I'm curious... which speaker do you think has which line? Both, perhaps?

Click to expand...

... I *did* use interdependence Funding comes in many forms above and below the obvious means ...

Very diplomatic answer. Also known as a "dodge." Good job. ;-)

Prime Junta said:

Very diplomatic answer. Also known as a "dodge." Good job. ;-)

Click to expand...

It wasn't intended as a dodge - I think that too often a 'black or white' answer is sought when the reality is much more gray. Because when it comes in terms of direct aid, sending troops or hardware or whatever, the world tends to look to the US more than any other single country ... but given deficits and cooperation deals and other behind-the-scenes stuff, the flow of money isn't ever particularly 'transparent'.

txa1265 said:

It wasn't intended as a dodge - I think that too often a 'black or white' answer is sought when the reality is much more gray. Because when it comes in terms of direct aid, sending troops or hardware or whatever, the world tends to look to the US more than any other single country ...

Click to expand...

Yes, Americans do like to think that.

...but given deficits and cooperation deals and other behind-the-scenes stuff, the flow of money isn't ever particularly 'transparent'.

Click to expand...

That it isn't.

Prime Junta said:

Yes, Americans do like to think that.

Click to expand...

... .

A couple of facts about foreign aid:

(1) The USA is the largest individual donor nation.
(2) Almost all US foreign aid comes with very short strings attached: it goes to reward political allies. This is not the case with most other donor countries.
(3) As a percentage of GNP, the USA is towards the bottom of the pack of industrialized countries when it comes to foreign aid.
(4) If you consider the EU as a single economic unit, it is quite a long way ahead of the US in foreign aid, both in absolute and in relative terms.
(5) In UN peacekeeping operations, the USA comes in at number 43. It has about 300 peacekeepers around the world. The largest single contributor is Pakistan, with over 10,000 peacekeepers. (I won't go into the NATO peacekeeping operations here.)

What I'm sayin', is that the world does not, in fact, look the USA first for assistance or relief. The reasons are that (1) the assistance isn't anywhere near as big as Americans like to think compared to what other countries contribute, and (2) it always comes with some very tight strings attached.