How do countries end up with worthless currency? Like countries who’s dollar bills lie on the ground or are burned for warmth because it has no purchase power anymore
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There are primary forms of currency: Fiat and Standard. Standard means there is something universally valued that the currency represents: For every unit in circulation, the government has so many units of valued item stored away that can be given to a holder. If you print more units of currency than you have valued item in posses, the value goes down. Remove them from circulation, the value goes up.
Fiat currency represents the “faith and trust” of a government….yep….that’s it. There is actually no REAL value behind a fiat dollar other than the ability of a government to, in theory, ensure that dollar’s value doesn’t change.
So…what happens when the “faith and trust” of a government changes? HOW does it change? Well…it happens when the government is unable to pay its bills, namely its debt, and when the perceived “desire” for that currency changes. In short, a currency itself is subject to the same alws of supply and demand any other good is.Nations are often (read always) in debt to other nations, it’s the modern method of financing…nations. As such, when nations are in debt that have to pay on that debt (interest and principle). When a nation is unable to pay on its debt payments, the “faith” in the nation’s ability to continue to do so is damaged, thus decreasing the value of the currency which ironically begins a cycle of devaluation.
This faith/trust also reflects on an economy becaue the idea is that a government gets its funds from its economic strength (by taking money from citizens/businesses in the form of taxes). If a government is unable to pay its debt, that means the economy is not strong enough to support the government and thus the faith/trust in the economy itself decreases.When a nation’s economy shrinks, the demand for that currency ALSO shrinks becasue fewer entities feel that possesing that currency is a worthwhile investment.
So, what THEN happens for both standard currency and fiat currency when there is an expected shortfall…more currency is printed and somehow injected into the economy. Boom…more money, more perceived wealth, payments on time.
The problem though is that economies naturally balance and the more money being spent (more supply), then the more money is desired (demand). Unlike most goods, for a currency a supply/demand relation is direct: more money in circulation, the more it’s desired…at first.
However when its discovered that there are more units of currency than should be representing an economy and that the nation had to make MORE to cover its costs…faith and trust drop…value drops…and more currency is needed for everything.
In a way, this is why the United States has experienced such incredible low prices when its economy is actually…not that big. An economy in reality requires the production of GOODS to be strong (minerals, manufacturing, agriculture). The united states however has become a tertiary economy meaning it is primarily based in the provision of services (which has no inherent value and effectively converts wealth from one form/location to another). The US economy, despite steadily reducing its production powers over time as jobs were outsourced, has maintained a stunningly strong dollar via the petrodollar: the dollar was the ONLY currency allowed to be used to buy/sell oil. This caused demand for the dollar to be artificially high.
Needless to say that now that nations are beginning to move away from the petrodollar, the value of the US dollar is about to have a bad day.
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