How can a currency lose its value?


How can a currency lose its value?

In: 2

TECHNICALLY it doesn’t. 1 dollar will always be 1 dollar. But when the government continues making 1 dollar bills, more people can afford things, which affects supply and demand. People jack up prices for things since there will be a higher demand for them, which then devalues the currency. But 1 dollar is still a dollar, it has no real intrinsic value

1) The most common method would be people losing faith in it because their government just keeps printing more and more of it. Zimbabwe is a good example of this. They experienced years of hyperinflation–a peak inflation year-over-year of 89.7 SEXTILLION percent. They were printing 100 TRILLION dollar bank notes–you can still buy these on eBay (for less than 100 trillion USD). They eventually scrapped their own currency and adopted the USD.

2) Another way for a country’s currency to lose its value is if it stops being a reserve currency. Central banks hold many different types of currency to avoid fluxations in prices. The most held currency in the world is the USD which accounts for around 58% of holdings. The second most held currency is the Euro with around 21%. The Yen and UK Pound are around 5% each, with the Yuan and CAD having about 2.5% holding. If for whatever reason, one of these countries lose their reserve status (central banks no long use them), then their value could drop precipitously.

It happens when the amount of currency being traded increases relative to the goods and services being traded for that currency. This can happen because more money is created, because fewer goods and services are being traded, because people spend the money faster to keep their wealth in physical objects, or because people start using a different currency.

Most people will be doing supply reasons (the creation of money because that’s all the rage these days)

The flip side is Demand, whether people actually want the currency. And we’ll briefly go over that.

Consider country A with currency X. A is a nice country, peaceful, hard working people, everyone likes them. But then they have a revolution! A power hungry madman seizes power turns it from a democratic paradise with lawful institutions into a dictatorial hellhole.

What does this mean for currency X?

Before, you had tourists and investors who wanted currency X so they could buy stuff in the country (souvenirs and fancy cars and etc). Now? Now no one wants to visit or spend any money there at all. So currency X loses value as everyone seeks to get rid of it (money you can’t spend isn’t really money at all).

If people don’t want your currency, then they won’t trade you other things in exchange for it. That means it’s lost its value.

People might not want your currency because *other* people don’t want your currency. For example if your government is hostile to my government and has put sanctions on your government, then none of my citizens will want to buy your currency, because no one here can accept your currency.

Or people might not want your currency because there’s too much of it, it’s too easy to get so no one will give you anything valuable for it. Think about water. Water is useful to drink and do other stuff, but it’s not *valuable* in a monetary sense. I would never sell you my car and accept 10,000 bottles of water as payment because I don’t need 10,000 bottles of water. I can get water anywhere, usually for free.

Money is usually hard to get, you can only get it by giving people stuff that’s valuable. If you could get it really easily, then you wouldn’t have to give up anything of value, and so it itself wouldn’t be valuable.