Hey every body this is Alex Merced. This is going to be the second economic discussion and today I am going to discuss currency. Before we discussed supply and demand and how the market is created by the battle between supply and demand which is a by product of the fact that we live in a world of scarcity, finite resources.
So now here we go. We have market of a supply of different resources and then demand for those resources but everyone has a varying idea of what those resources are valuable to them. From a totalitarian sense, the person who in to derive most value from a certain resource should be the one who uses the resource. How do we dictate value in comparison from one person to another? How do I know how can we quantify my value for a certain product compared to your value for a certain product and this is where currency comes in.
All currency is like language. It's a way to translate value numerically, kind of like we use inches from distance in miles and stuff like that. I mean me saying it's far away could be different than what you mean by it's far away but when I say it is two miles away you know two miles away.
Same thing if I say this is valuable to me you might not understand how valuable to me but I if say this is worth five bucks to me certainly because very clear on how valuable this resource is to me. So when it comes to currency, the whole idea behind what currency is is you must understand that it is only a medium of communication, communication of value.
Now where it gets complicated is when you money the waters of the uniformity of value. Essentially when you dilute a currency, the amount of value that this currency can measure is diluted. When that happens the money I have can no longer communicate the same amount of value that it did before, since there is -- again the supply has grown. When the supply grows and the demand is less prices go down. As we have been seeing with the dollar as late. Many new dollars have been printed by the Federal Reserve etcetera, etcetera, etcetera, and this has created an extra supply of US dollars which has seen a drop in the value of the US dollars which we have been seeing happening for years on years.
As long as we have had a fiat money supply. Point, Fiat Money Supply means a money supply backed essentially by Central Bank, a paper money supply. There is nothing backing the US dollar other than the belief that it's worth something. When you have a commodity-based currency what you do is you issue paper money that's worth a certain amount of the certain commodity. So the value of that paper doesn't change because it is always going to be worth that amount of that commodity. So you have a stable currency such as a gold or silver standard or any commodity I mean I wouldn't issue commodity based money on something like rice but you get the idea. The point is that there is something that dictates the value that backs the money.
So that way if I say I am giving you this dollar and it is worth a ounce of gold there is no political debate whether what this dollar is worth. The fiat money supply it gets muddier since it is a function of the supply of dollars, a central bank can print out more dollars to make a product assist or to manipulate the economy and manipulate the prices. And this is how you get inflation and deflation. Inflation deflation is basically the adjustment of the measurements of these dollars as far as the value goes. Now when there is inflation after inflation my dollar won't measure as much value as it did before. After deflation it will measure more value. Now if you will think initially oh deflation sounds like a great thing. Deflation isn't good either, but in the end how much inflation and deflation you get should be a function of what goes on in the market. The reason I say this is because the market is again a sided piece of two fighting forces but in the end those forces are created through natural human behavior and the keyword being natural. If the demand goes up for something it is because more people naturally want it.
The supply goes down for something because it was naturally undervalued and it got excessively devoured, the prices went up. They are natural function, but when they get manipulated from outside the market through government policy or through corruption then you have issues, and you see unrealized or unrealistic changes in the way the market's dynamics. But in a free market, a market free from manipulation the prices are always dictated by the true supply and demand. How to create a true free market? It's arguable has the world ever seen a true free market? Once again arguable. Probably e-based by the closest thing I can think of. But again you see the price of manipulated -- of currency it can be manipulated in many ways. But yeah, money supply usually there is central bank. Central bank can print money it can take back money in and I will talk more about that when I discuss the Monetary policy, but a quick sign of that I think it's a very interesting thing to understand as far as the US dollar is concerned is many countries actually back their own currency with US dollars.
So their currency is actually based on the value of the US dollar making it sort of third degree currency. Now what's scary about that is when you see a manipulation -- when the manipulation of another country's currency affects your currency and the purchasing power of the money you would account for it creates an international dilemma.
So it comes to the US dollar the monetary policy is quite important and this co-policy affects the value of the dollar as well. We will get into that. But again understand, the US dollar goes far beyond just the US economy because many countries are one, invested in US dollars in many ways whether it's to pay back their currency or US owes them a lot of money. There is a lot hinging on those dollars. Sometimes inflation can be arguably caused on purpose because it devalues. So when you see the US deficit or the debt, the American debt, if you cause inflation essentially your debt is less, if you have deflation your debt is worth more since each of those dollars is essentially more value.
Again a currency let's say one dollar it's just a container of value. How much value that it contain is the issue of inflation deflation. So if you can think of currency as containers of value you will be able to understand the changes in the market and the changes and why the value of currency is such an important thing to understand when understanding the economic landscape. So that's my discussion on currency. Again I will be discussing hopefully fiscal and monetary policy in the next couple of videos. So, keep listening.
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