Sunday, October 17, 2010

What's money worth?

Last week I listened to an interesting podcast from NPR's Planet Money in which four economists from Brazil saved the country from a horrible inflation problem. It was pretty fantastic, and I definitely recommend giving it a listen.

As you may already be aware, inflation is an increase in prices not because products get better, but because currency isn't worth as much anymore. It's common, but it can be terrible in big doses. Hyperinflation means the value of your money starts to drop off, making you poorer even if you still have the same amount stashed under your mattress.

Bad inflation can happen (and did in the case of Brazil and post-WWI Germany) when governments print too much money to pay off their debts. Essentially, since there's more money out there, it's worth less than it was before. So prices go up, and you're stuck with what's in your wallet.

In Brazil's case, prices were going up like crazy: 80 percent inflation per month. To cite PM's example, a $1 carton of eggs would cost about 2 bucks next month, and after a year, they'd be $1000. Check out the story for other interesting tidbits, but here's the spoiler: they fixed the currency by replacing it.

The interesting part is that it was all a trick; they replaced the old currency with a new one, and the pure fact that people were more confident in their currency meant it was worth more.

Enter crazies to inform us that it's for this specific reason that we need to be back on the gold standard, that our money is worthless, that it only has value because we say it has value. In the old days, you could actually trade your dollar bills in for gold and silver from the US Mint. But no longer. Well, joke's on you, crazies: gold is only worth what someone will give you for it. So is silver. So are diamonds. So is shiny, compacted moon dust. And so are dollar bills.

(Note: some non-crazies have debatably less empty arguments for why we should be on the gold standard, such as limiting the Fed's ability to manipulate interest rates. But we can get into that another time.)

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