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The Era of Paper Money System

The Era of Paper Money System – Investment Review

Paper MoneyMonetary System

In the present financial era, having enough paper money won’t guarantee that you will stay wealthy forever. Wealth can be defined more precisely as the ability to fulfill your wants or desires, something that has real value that increases with the costs.

In 1933, when U.S. terminated the use of gold standard for domestic currency, any constraint on the issue of base money was effectively removed. The State now has unlimited spending power in base money, and necessarily holds a monopoly on its issue.

Base Money

Base Money is the sum of total real cash in the economy except cash held by the Government or Central bank’ here real cash means currency notes and coins.

So money base doesn't include debt or near-money items such as commercial bonds or letters of credit and other measure of credit.

Money base or Monetary base, is the actual source of money supply printed by central bank that multiplied several times, as all financial positions in the economy have taken against the real money base, like credit generation, debt and near-money promises/bills, this become an ongoing process after it’s re-lent again and again by the banks and financial intermediaries.

Why people need to Invest?

The basic reason why people invest is that they believe investment will help them surviving the burden of inflation as well as taxes in the future course of life.

As pointed above, money as the normal state of affairs can be printed, nearly at will of the regulators and left in the hands of Government, suffering with the chronic problems of deficit they always spend more than they have. Inflation, as generally believed, hasn’t the sole reason for a decline in the value of money.

Money is just like number of paper pieces or an electronic copy in a computer that by general agreement gives its holder a claim on real wealth. In confusion, people only concentrate on the money and neglect those real things that actually sustain a good life.

The Paper Wealth Review

Despite money as currency, other categories of wealth, like bonds or share certificates or house documents etc. are also sheets of paper, that’s what the world witnessed during current financial crisis as the creditability of these sheets of paper turned out to be much lower from expected valuations, the end result was the collapse of big corporate giants due to wrongful and aggressive investment decisions.

Typically, the basic character of money assures fall in its value over time, as determined by various studies undertaken by economists and regulators. Now the question arises, what are the basic reasons behind fall? Keep reading…

U.S. Dollar and Fed Monetary Operations

US Dollar, as base money is quite a monopoly of the State, Federal Reserve issue sufficient amount of funds, with an objective to avoid any shortage of taxes paid by the public. In simple words, Fed must provide whatever reserves the ‘banking system’ needs to ensure the liquidity of the payment system.

From different financial activities carried out by Fed exclusively, a couple of important ones include, accumulation of bank reserves and decrease in aggregate bank reserves. When Fed needs to increase aggregate, it buys Treasury securities from the public through money markets and credits the seller banks with additional deposits at the Fed. Likewise, Fed sells Treasury securities to the public (through money markets) from its own portfolio when it needs to decrease aggregate bank reserves.

Although Bank reserves are only a small percentage of monetary liquidity, but these functions by Fed are vital to balance supply and demand for bank reserves at the Fed's determined standards, on very short-term or overnight inter-banks loans.

Monetary Cycle - The Ripple Effect

To study the monetary cycle let’s consider US dollar as base currency and inflation as an economic problem arise due to bulk supply of US dollar in the world markets.

So, with a decrease in dollar value due to inflation, export figures also decline and exporters get hit, then they (exporters) don’t invest in US debt and mounting debt leads to depression. In the Era of Dollar Standard as base money and with world liberalized markets and trades, the problem become global.

In brief, the cycle works in the following pattern:

  • The U.S. dollar’s value falls due to Federal Reserve policies like, extra liberal credit and artificially low level of interest rates.
  • Now, People cannot afford to purchase as many foreign goods.
  • Foreign suppliers and manufacturers, when unable to sell at previous levels, have piled up with excess inventory, which causes an inflationary outcome.
  • · Foreign exporters and their governments, in an effort to overcome the pressures of inflation, blame the fallen dollar for the problem and start or warn to start moving out of U.S. dollar instruments.
  • So, if debt returns to the U.S. the economic system is unable to absorb it. This can lead to a devastating recession of all times.

Let’s Conclude

When you review trends in monetary value, you can observe that income has not declined in figures. Well, that’s not enough as you can also observe that prices have risen faster than income, so with decreased buying power your real income potential also declined. Incomes have not been rising to match the price inflation. That’s what happening when the value of the money declined and this is the reason why you should study money and monetary system to make your investment decisions.

Preserving the value of the money or making it grow needs sound investment knowledge, experience, active approach and strategies, but that’s not an easy task for many. That is why I am writing these posts to help you and other readers like you. This is the whole purpose of this web-log: To give readers the strength of knowledge, so that they can use and learn for actual investment decisions.

Remember, learning and knowledge is of no use if you don’t practically implement them in real life situations. With experience you always learn with some mistakes’ as you know; to err is human, but repeating same mistakes that lead to failure is not an option.

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