The Basics of Money
The basics of money are important for a number of reasons.
These basics coupled with the information in Bad Monetary Policy will provide a solid economic and monetary foundation needed to help you learn.
• How to invest in this strange new economy.
• Ways protect your wealth during these uncertain economic times.
• Different ways to generate additional income.
This information is being provided to increase your knowledge base. The more you know about a subject (the basics of money in this case) the better prepared you will be for making smart financial planning decisions.
Let’s first ask the question: “Exactly what is money?”
The simple answer is:
Money is a medium of exchange for goods and services.
Money usually includes currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial institutions).
Currency is the physical aspects of a nation’s currency. This includes such items as paper money and coins.
This page explains money creation, evolution, currency debasement and the ravages of inflation and hyperinflation to help increase your knowledge about the basics of money.
The Evolution of Money
The evolution of money is important to understand when exploring the financial, economic and political systems that drive monetary policies. Monetary policies affect the economy, and the economy affects our personal investment outcomes.
How Money Becomes Worthless
How money becomes worthless is an important subject. This page covers some of the primary ways that money loses great value. These topics include: hyperinflation, redenomination and ceasing to be legal tender. It then feeds into currency debasement.
Currency debasement is the practice of lowering the value of money. It has been used by monarchs and politicians for thousands of years to minimize the burden of huge debts without inflicting major taxes on their subjects or citizens.
In other words, debasing a currency is done for financial gain of a government over the expense of its citizens. Since the beginning of modern banking and the invention of paper money starting the 1600’s governments learned the power of the printing press to create money out of thin air.
How Currencies are Debased
How currencies are debased is important to understand. It provides a lens to see what the future may hold for many of the world’s fiat currencies. This page covers some common debasing techniques by governments. They include: reducing the quantity of a commodity, eliminating commodity backing, deficit spending and fractional reserve lending.
The Effects of Inflation
The effects of inflation are the erosion of the purchasing power of money. It is a stealth destroyer of wealth. Inflation is the rise in the general level of prices of goods and services over a period of time. When general price levels rise, each unit of currency buys fewer goods and services.
Fiat Currencies and Hyperinflation
Fiat currencies and hyperinflation are closely related by cause and effect. When a government moves to a fiat currency that is backed only by government decree there is a great temptation that occurs for most politicians.
Like drunken sailors the politicians encourage the rolling of printing presses to pay for huge public works projects, entitlement programs, funding wars, political luxuries and other extravagances that are frequently unpopular with the tax paying public, but create greater power for the government politicians.
What's wrong with deflation?
When goods and services are deflated, everything is cheaper. You get more for your dollars. What could be wrong with that? There are some compelling arguments both ways—but be careful; the game is rigged!
Final Thoughts on the Basics of Money
The information presented in this section is concerning. However it is necessary to learn so you can make informed and wise
and Wealth Management decisions.
Also, critical thinking, problem solving and decision making are important skills needed to make good financial decisions.
If you need assistance in these areas please see the sister site that was created to help strengthen these skills.
It is called:
Problem Solving Techniques.com
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