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Politics : Liberalism: Do You Agree We've Had Enough of It? -- Ignore unavailable to you. Want to Upgrade?

To: tonto who wrote (130974)	4/23/2012 6:13:07 PM
From: TimF	1 Recommendation Read Replies (2) \| Respond to of 224744

Backed by something doesn't mean too much directly. It can be very important indirectly, giving people more confidence in the currency, and also limiting how much the money supply can increase, but the acceptance of the currency seems more relevant here than the backing. One form of currency with a solid and inflexible backing could reduce inflation by reducing the increase in the money supply (harder get a lot of new gold then it is to run the printing presses), but once you have an established currency (which we do, the dollar), the question is more will the new currency be accepted then will it be backed by something. (Being backed by something might help it get accepted, but then while the backing would be important, it would be important indirectly on this point not directly) If its not accepted it doesn't function as currency and so doesn't effectively increase the money supply. If it is accepted, then whatever its backed with (including nothing), doesn't change the point that it represents new nominal purchasing power, without representing new production. If the new currency's supply is limited it might not have inflation itself, it might be a stable (or possibly deflationary) currency, but it would, if it was very widely used and accepted, and if the fed didn't reduce the dollar monetary supply (or reduce the growth of such supply) to account for this new money circulating, increase the total supply of circulating accepted money, and thus represent more demand for goods putting upward pressure on prices. Even a controlled stable currency, ass an addition to the old currency, increases how much money is out there chasing goods and services. Or looked at another way to the extent people use the new currency instead of some amount of the old currency, it represents reduced demand for the old currency, effectively lowering the old currencies value. If the new currency is a small factor it doesn't do much, if it takes over then inflation or deflation or stability is determined by the new currency not the old. But if it becomes a major factor (not "accepted by over 5,000 vendors", more like accepted by and used by, just about everyone), without taking over, it will likely create inflationary pressure as its adding to the total money supply in circulation.