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Like in India and many other countries, value of their currency is going down and down. What can be the possible reasons for this ? I am not a economics student, still want to know what exactly is there behind the screen ? thanks. ;)

Edited by nitin1

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Last Post by vegaseat
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You want to know the reasons behind currencies going up or down in general?

To answer that, you have to understand what money is. Fiat currencies (which are most currencies today) are records of debts that the treasury (government or a major bank) has incurred with the central bank (the bank that issues the currency). In other words, it is what we commonly call an "I-O-U", meaning that a 10 dollars bill means that someone borrowed 10 dollars from the central bank at some point. Meaning, someone has a debt to repay, and can only repay that debt in the same currency it was incurred (i.e., if I borrow something from someone, I must give back that same thing, not something else). This means, someone "wants" that currency, and if someone wants it, someone is willing to trade something for it (work, goods, etc.), and that is what gives the currency its value (i.e. just basic supply and demand). And the entity most interested in a currency is the state(s) to which the currency is tied, because they are the biggest original borrower(s) of the currency.

Once you understand this, you can easily figure out how and why the value of currencies go up or down.

As any record of debt, its value is measured by the trustworthiness of the borrower(s). If a borrower defaults on his loan (i.e., bankrupts), he is no longer looking to repay the debt, which lowers the demand for the currency and thus, its value. On the other hand, if the borrower is a really good shape, he will be eager to repay and thus, will increase the demand for the currency.

And if you are wondering "what if all the borrowers repay", well, technically, that would mean there would be no more of that currency in circulation. But that's impossible because the borrowers borrow with interest. This means that if a person borrows 10 dollars today, he must repay, say, 11 dollars next year, but there are only 10 dollars in circulation in total, so he will never be able to pay, and that's the whole point of this system in the first place. The value of the currency is based on the need to repay a debt, and the total debt is always higher than the total money supply, and thus, will never go away (i.e., the currency can never completely lose its value, until someone abolished the central bank and declares that the debt does not to be repaid).

So, overall, when you can trust that the main borrowers of the currency are in good shape and will remain so for a while, then you will trust the currency's value, and thus, will be more likely to buy some for yourself (if you are an investor) for safe-keeping. On the other hand, if you cannot trust the main borrowers, you might invest elsewhere, and if there are many with the same opinion, the currency's value will go down.

Another important aspect of this is supply. Again, simple economics apply to this. If there is a lot of currency issued already (the money supply), then it will be worth less than if the supply was more scarse. Another way to look at this is that if you take all the "wealth" in terms of real assets (houses, raw materials, trucks, etc..), and because money can be exchanged for those assets, the total amount of money in circulation represents the total amount of assets people have altogether, and if there is a lot of money in circulation for the same amount of assets, you need more money to buy the same asset, which is called inflation.

It's important to understand too that the amount of money in circulation is not measured by how much was issued by the central bank (as one would assume). Lots of people can "hold on to" their money, and thus, contracting the money supply. For example, in a recession, people are more likely to safe-keep their investments and money (which is one form of "safe" investment). And at this point, the central bank can issue as much currency as they want, it won't make much of a difference (as we see in the US, where the Federal Reserve prints money at near-zero interest to big banks, which mostly safe-keep that money in safe investments, and thus, no positive change in the money supply to the real markets).

So, you see, this gets very complicated, really quickly.

There are also gold-backed or silver-backed currencies, called representative currencies because each unit of currency represents some specific amount of some precious metal or whatever else (could be anything that has a stable value, including foreign currencies, like many countries have a USD-backed currency). There is really not that much difference compared to fiat currencies. In the fiat currency model, the borrower comes to the central bank and says "lend me 10 dollars, and I promise to repay at X% interest". In the representative currency model, the borrower comes to the central bank and says "give 10 dollars for my Y pounds of gold, which you will safe-keep at a fee of X% of its value". And even then, the "real" value that backs the currency is just another commodity with its own supply and demand dynamics which make things behave virtually identically to a fiat currency. So, overall, the rules are no different. The only difference is the danger for "hoarding" of the real asset that backs the currency, i.e., whoever has more gold controls the fate of anyone using a gold-backed currency. This is why most countries with a leg to stand on (i.e., have some economic strength of their own) and want to be able to set their own economic policies will choose to use a fiat currency, which is then valued based on that country's economic health and affected mostly by that country's policies. Small and poor countries often choose to base their currency on another country's currency or on gold or whatever, mostly to guarantee a stable value (which can have a lot of really bad consequences, but I won't get into that).

Long story short, money is just a commodity like any other, as far as the economics of it goes. Supply and demand applies, just like it does in other commodities like gold, oil, corn, whatever. And like most other commodities, most of its value is just speculative value (i.e., what people think it's worth).

If the Indian currency goes down, it's because many people don't think it is worth as much, because of the risk of India's economy slowing down or whatever else. That's another aspect too, if a country loses its real assets but increases its money supply (or decreases it not as fast as it is losing assets), then the value of the currency goes down for the same reason as explained earlier.

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same question as from , do you have any software to do that ;) well said!!
How do you type the much in every question!
Very well said!
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Mike 2k said that very well; a slightly different way to look a fiat currency is that it is the value of 'work' produced or a convenient way to keep track of barter. Carrying around bushels of wheat to trade for pounds of fish is just plain awkward. So we all agree that a certain number of pounds of fish are worth a certain number of bushels of wheat - since it is a relationship that is in constant flux we try to assign a value to the relationship and all agree to accept that valuation. Currently, the most stable currency in the world is the US$ so the world agrees to use the US$ for keeping track. There are a lot of people who somehow think that backing currency with gold is a good idea - but it isn't for a couple reasons; there isn't enough gold in the world to back the world's economy and the cost of shipping gold around the world would suck all the value out of the gold. If the world were to agree to use gold as the standard, it is essentially the same thing as the world agreeing to use the US$ as a standard - both are arbritrary.

As a sort of joke, the Big Mac has also been used to compare world's productivity - The Economist first did this back in 1986 - the current comparison tool is here.

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There are a lot of people who somehow think that backing currency with gold is a good idea - but it isn't for a couple reasons; there isn't enough gold in the world to back the world's economy and the cost of shipping gold around the world would suck all the value out of the gold.

Or mostly the fact that the value of gold is mostly speculative. In terms of real supply (the amount of gold we have) and demand (how much of it we actually need), there is a huge gap. Gold can be considered a very plentiful metal, and it's extremely overvalued (in terms of "real" value, whatever that means). But that doesn't matter in the world of commodities' trading, it's all speculation, as long as it remains within acceptable bounds for those who actually need it (e.g., there are limits to how much you can speculate on oil, because a lot of people need it and won't accept paying too much for it). We are almost hard-wired to believe that high price means scarcity, but more often than not, it has little to do with it (i.e. scarcity will cause high prices, but high prices are rarely due to scarcity). The bottom line is that gold has a high value because everyone agrees that someone who has a lot of gold is a rich person.

If you were to tie gold to a real and dynamic economy, things would change quickly. The reason for the stability of a commodity like gold is because it is not tied to any real economy, as I said, the amount of gold that is actually needed for anything (making jewels, electronics, etc.) is minuscule compared to the supply. Virtually all the gold is "used" as savings, which is not an economy, let alone a dynamic one. If you start to say that employees can be paid in gold, and milk can be bought with gold, then its value would start to fluctuate just as much as any existing currency, except for the fact that controlling the supply is more difficult (it's harder to mine more gold than it is to just print paper bills). Some gold-backed currencies can work, but only because they are not significant on a world-wide scale.

there isn't enough gold in the world to back the world's economy

That's irrelevant. If there is not enough gold, its value will increase, and then you'll have enough of it. It might make some people angry, i.e., those for whom gold is a significant expense (like electronics manufacturers or whatever). But mostly it would make many people unacceptably rich, i.e., those who currently have most of the gold (which are already unacceptably rich, if you ask me).

the cost of shipping gold around the world would suck all the value out of the gold.

Why would you need to physically move it around? That brings about the problem of control over the supply. Obviously, you don't need to move the gold around, but you need to have a bank (or many banks) whose job is to print the gold-backed currency in exchange for some actual gold that it will keep in its safe. After that, nobody needs to actually handle the gold, they just trade the currency, like we do now. The problem is that ultimately, the control of the gold supply is in the hands of the banks that safeguard it. Which is not very different from the current system (with central banks), but still, it is worse.

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IMO there's no such thing as "unacceptably rich". The whole idea that people should be kept poor (or at least all within a specific and small margin of the poorest members of society) is a major factor in getting us into the economic crisis we are in and making it next to impossible to get out.
Potential investors are taxed to the point they have no money to invest, potential entrepreneurs think twice about starting a business on a loan (which that investor will likely deny them because he has no money to spend, but let's say he finds one able and willing to take the risk) because he'll just be penalised for his success (if he has it).

The Gold standard for currency worked well, until it was abandoned by countries needing a quick cash infusion for their governments that wanted to go on a spending spree for which their gold supplies lacked the backing volume.
So they abandoned the gold standard and just decided that the currency would be worth whatever the government said it was.
Result of course is inevitably high inflation, government budgets spiraling out of control, eventual monetary collapse, and poverty for all but those having control over the money presses who just print more money for themselves, leaving the rest of the population poorer still as a result.

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because he'll just be penalised for his success

I seriously doubt that the rick (especially since Reagan) can legitimately claim to be punished. They are the only group that has seen their income rise significantly in the last few decades. They enjoy numerous tax breaks that are unavailable to the middle class. Warren buffet said “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

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Why would you need to physically move it around?

Because the point of having gold as a standard is the paper currency can at any time be redemed for gold (even if only theoretically) - the people would have to beleive that their country has the gold to back the currency - for each currency in use so the Nation's Bank would at least looked like it could cover its currency

The Gold standard for currency worked well,

The Gold standard only worked because it was illegal for citizens to own gold and the value of gold was artificially frozen at $28 per troy ounce here in the US

Potential investors are taxed to the point they have no money to invest, potential entrepreneurs think twice about starting a business on a loan

This is one of your craziest statements - there is no one in the US who is taxed to that extent. Taxes in the US are at an all time low and the countries infrastructure is failing to show that.

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You can always count on good'ol jwenting to come out of the woodworks and intervene in any rational discussion, and take it all the way to crazy town.

IMO there's no such thing as "unacceptably rich". The whole idea that people should be kept poor

There is a middle ground between "unacceptably rich" and poor, you know? For example, you could double the income of nearly half of americans if you seized the income of the 400 richest individuals and redistributed it. This would literally eliminate poverty in the US. It's not about keeping anyone poor, in fact, quite literally the opposite.

Potential investors are taxed to the point they have no money to invest

1) You are probably taxed at a much higher percentage than any potential investor.
2) Investors are only taxed on captital gains or interests (and at a very low rate), meaning there is no adverse tax-consequence from investing the principal. And the alternative (not investing) is much worse, even as far as taxation goes.
3) "Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered," -- Warren Buffett, while dismissing this argument that he qualifies as a crazy fantasy.

The Gold standard for currency worked well, until it was abandoned by countries needing a quick cash infusion for their governments that wanted to go on a spending spree for which their gold supplies lacked the backing volume.

Not at all. The gold standard and the brief silver standard (in US) were largely toppled by the inhability to consolidate the control of the reserves and supply of the precious metal. It worked fine as long as the English controlled the gold reserves almost entirely, but as economic power started to shift around more between US, England, and other European powers, it was more and more difficult to secure the reserves and prevent shifts of the valuation. It was simply too unstable. A fiat currency allows for smoother and more stable values even as economic power shifts between nations.

And in a fiat system, the governement cannot go on a spending spree any more than with a gold standard, because (1) the government does not issue the money, and (2) the issuance of money is always tied to a debt. There are systems in which the government can print the money itself, and where the issuance is not tied to a debt, and it has been tried in the US (with the "greenbacks", whose name still remains in use to this day) by Lincoln to finance the civil war. These systems have some definite advantages over fiat or representative currencies, but it does mean the government has absolute power and responsibility over its value (I guess you wouldn't like that). The point is, a fiat currency is very different from that kind of system.

So they abandoned the gold standard and just decided that the currency would be worth whatever the government said it was.

In a fiat currency, the central bank influences (doesn't decide) what the money is worth by the level at which they hand it out. And they mostly hand it out to large private banks, not the government.

Result of course is inevitably high inflation, government budgets spiraling out of control, eventual monetary collapse, and poverty for all but those having control over the money presses who just print more money for themselves, leaving the rest of the population poorer still as a result.

That is one of the biggest sequence of non-sequiturs I've ever seen. Care to explain each of them with evidence to show it? Good luck. But thanks for this little tour around "crazy town".

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