Money 2

I came back (06/18/08). Yesterday, I was in hurry & I could not able to complete the whole piece about the printing money. Here you go with some factual information about the crisis & terminology.

There is nothing to prevent Senor Chavez, for example, from printing as much Venezuelan currency as he likes. He can even lie about how much is in circulation if he wishes. [In the US, the Federal Reserve prints the amounts needed and decides how much to permit]

Of course, money is only worth what it will buy. If real goods are scarce, as they are now in Venezuela, prices will rise [or goods will disappear from shelves and transactions will take place in the alleys in lieu of the stores].

And the local currency will fetch increasingly fewer units of foreign currency, even from the black market guys in those alleys. As it’s currently happening in Venezuela, in fact. The process can go on and on for many years -- and it'll eventually cause either the economy to implode or a change in government. Might be years though -- Weimar Germany ran hyperinflation for about a decade before the reforms of the 1930s. Germany's new government in 1933 turned out to not be so good for the country though -- or its neighbors.

The country's laws only regulate the amount & only the treasurer and his department can decide how much currency the country should print. No one can stop them except if they print too much, the value of the currency can come down. Hence, the term was called as "Fiat Money".

Fiat Money: Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.

Just think; Most of the world's paper money is fiat money. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation's paper currency, the money will no longer hold any value.

I’m sorry, I missed another question. How often does the Government print money?

The central bank (i.e., the Fed in the US) of any country does the money printing. In some countries these are directly controlled by the Government and in others they are not (like many western countries).They generally only print enough to replace old notes and coins which they take out of circulation and destroy. If they just printed heaps of money, inflation would skyrocket as the money is pumped into circulation. This happened to some South American countries in the 1980s (like Argentina) when they tried to finance their budget deficits by printing more money. (Note: America deserve the gold standard, just read the Fiat Money again)

It seems that you all waiting for today’s dinner chat, but I have to tell another two terms which I missed here are Repo rates & the Inflation…….