Friday, January 13, 2012

Money: Oh the Mess

Ponder this. If no one spends any money, what is it's value? Pretend we all barter again; go on, just for the fun of it.

The paper stuff you have in your wallet or the numbers stored in your bank account, or even the physical gold and silver you might possess. All this is money, but if it's not used as a medium of exchange, it's useless. Although paper could light a fire and gold could be used in my teeth.

Now, this is not rocket science, but it does help one to understand where money is at right now.

As long as you and I accept that when we sell something of value and receive a paper note for that value, we can then turn around and purchase something or someone's labour at similar value by handing over that note to the party involved. He/she then goes and spends it on something else, and so on.

All well and good until an ill wind blows through the system and we raise an eyebrow of doubt about the stable value of the money we are receiving. If we cotton-on that money supply is increasing faster than values we will understand we are being duped. At this point we will likely batten down the hatches and look to other stores of value.

Confidence in money can quickly turn from complete to zero. If that happens to paper money, welcome to hyperinflation. Hyperinflation is merely everyone spending the paper dollars they have no confidence in as quickly as possibly (eg as in Iran right now). This sends the velocity of money soaring (ie. the pace at which money transacts) and more and more volume of the stuff is needed to try and maintain value.

This is where gold and silver come into their own. One ounce of gold represents a certain value of labour, say, seven days work. When this 'thing of value' (gold and silver) is swapped for something else, it has shown to maintain that value for the thousands of years it's been used in this way. An example, an ounce of silver will just about buy the same amount of petrol (gas) as it did 30 years ago. Can gold and silver hyperinflate? No. Why? Because they are finite things. They cannot be printed with a keyboard or readily gathered from dying stars.

The system is OK if we all permit it to be. If we all try and keep confidence in the 'thing' (paper or gold/silver) that we accept as a medium of exchange. Nothing wrong with paper per se. But right now, confidence is the key. Watch for it to continue to fall as people get wind of the large printing mechanisms underway at central banks worldwide.

Gold in New Zealand dollars: $2074.93 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $37.89 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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