The Economy, Lounge Style

[Borodog]

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Borodog. I am very interested in this subject.

Did you know that Greenspan was a student of Ayn Rand?

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Yes, I did. He was also a huge supporter of the gold standard, until they gave him the keys to the printing presses. [img]/images/graemlins/wink.gif[/img]

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I am also under the impression that credit is weakening the dollar. I calculated that the dollar is only about 1/10th of it's actual value because there is way more credit than actual money. Am I correct in my assertion. How do you think this is effecting the dollar, and is this why the interest rates change?

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This is not quite right. The "credit" you speak of is "real money", in every sense of the word. After all, you can buy stuff with it. The actual proprtion of the money supply that is physical paper and coins doesn't really matter much; it is determined by people's preference for holding cash versus using other methods of payments like check, debit, credit card.

But it definitely is "credit expansion" that weakens the dollar's purchasing power in the long run. By "credit expansion" we mean an increase in the money supply that is injected into the loan market. By increasing the number of dollars vs. the amount of goods and services in the economy, prices are bid up, and the purchasing power of the dollar falls. This is reflected in both price inflation and the weakening of the dollar internationally relative to other currencies. Of course the dollar weakens relative to those other currencies, which are also inflationary, over the long term because the dollar supply is being expanded faster than them. There are of course lots of short term things that can also affect the value of one currency relative to another that don't have much to do with expansion of the money supply per se.