Money, money, money!

Conclusion 1: Your money is only worth what you can convince people it is worth.     

This is the first in a series of posts which I intend to write about what I learned in this recession about the financial system.  Some of the things I found out are so obvious that most of us seem to have completely overlooked them.  At this point I would like to pay tribute to Paul Grignon and his enlightening Money as Debt video which was one of my first points of call in this journey of understanding.  I would recommend the video to anyone who wishes to understand the subject in more detail.

I was trying to figure out what money was worth, what was it valued against.  In the end I came to the conclusion that money is simply valued against people's perception of it.  To put it simply the money that we use every day does not really exist.  It is fabricated by each of our nation states as debt to other nations. So for example if the United States wants to print more dollars it will borrow those new dollars from some other country.  It can't simply print the dollars because this would cause a deflation in the value of the dollar.

By taking a loan from another country it may have a heavier burden of debt to service but it maintains its position that it has not changed the value of the existing dollars.  Or to be more precise, it can maintain the perception that the dollar is still valuable.  That is if you believe that it will be able to meet its debt payments.

Ok that makes sense, but where does the nation who is lending the money from get their money from?  Well they do the same thing.  In between all of this we have GDP's and interest rates and all other perversions to hide one simple fact.  Your money is worth whatever people think its worth.  Its 0% science and 100% perception.  If the financial markets decide that your national bank is not going to be able to stump up the cash to pay its debts they will devalue your currency.

There is however one currency which has always been the strongest and this is the dollar, for one simple reason: they lend and borrow the most money in their own currency. If the dollar is affected so values of currencies of a raft of other nations.  This lends stability to the system because no one wants to collapse the value of their own money.

But it does not change the simple fact that as a nation your money is only worth what you can convince people it is worth.

... continue on to Conclusion 2