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Economics

49 viewed last edited 11 months ago
Chris Matthews
0
Why does currency depreciate, yet things like education, food and any consumer product increases in price? Will a day come when the US dollar is basically worthless? I've heard the saying, "A dollar today is worth more than a dollar tomorrow."
Karthikeyan Madathil
7

> "Why does currency depreciate, yet things like education, food and any consumer product increases in price?"


Short answer: Currency depreciation means (by definition!) everything increasing in price.


Longer Answer: Currency isn't the same as food (a "good") or education (a "service"). The basic point of currency is to be able to exchange goods and services for other goods and services. We perform work (create goods or services), get paid in money, and use that money to buy other goods or services (possibly at a later point in time). The absolute price level of something is actually irrelevant, the relative price level to other things is important.


For example, consider a thought experiment - we magically give everybody 10 times the money they have, but increase prices of everything by 10 times. Does this change anything? No!


So - if the price of everything goes up, by extension that means money buys you less.


> "Will a day come when the US dollar is basically worthless? I've heard the saying, "A dollar today is worth more than a dollar tomorrow.""


Over time, the US dollar (or any other currency) will buy less, since Economists like small amounts of inflation and they set policy. But that should be ok, since wages will go up to compensate, and relative price levels will hold (barring price reductions due to innovation or increases due to shortages).

A dollar will buy more today, than tomorrow. That's why you pay interest when you borrow, and get interest when you lend money.

Srinivas Gunturi
3

I will just touch upon some of the arguments which are relevant. Many more can be made and indeed people have devoted their entire lives to identifying why/how some of these things happen.


1) A dollar today is worth more than a dollar tomorrow.


This is due to time value of money. If I have a dollar in hand, I can put it in the bank and get interest for one day and therefore have more than a dollar tomorrow. It may not work out for small amounts over small periods, but big amounts or longer duration, the effect can compound.


2) things like education, food and any consumer product increases in price


Inflation. Demand and supply issues can alter the equation e.g. Iphone 1 is worthless today due to no demand when Iphone X is available. When the product/service markets are stable, the prices increase due to inflation as the Federal Reserve in US and the other central banks in their respective countries manage money supply to target a certain inflation. When more money is chasing the same set of goods produced in an economy, people will bid up the prices. Stable prices/deflation may actually be detrimental to the GDP growth as people can postpone their purchase decisions specially for non-essentials.


3) Why does currency depreciate

Think of currencies also a products. In the foreign exchange markets, one currency is exchanged/bartered for another at a certain rate e.g. 1 US Dollar = 0.9451 Swiss franc. If for some reason, people want move their money out of Swiss economy and Swiss francs, then the demand for US Dollar will increase and the said rate can change to i USD=1 CHF or even higher in USD's favor. The demand for the local currencies changes due to macro economic factors like current account deficit, capital account balance, changes in risk assessment of the economies and a whole host of factors.


US is mostly immune to this as USD is the primary reserve currency across the world and most of the cross-border transactions are denominated in USD.


4) Will a day come when the US dollar is basically worthless?

The current account deficit of USA is very high. US is also a basic net capital account investor. If the world reduces/ends its dependence on USD as the reserve currency, then USD can see a precipitous fall. Again a set of complex factor will come into play, people from around the world may choose to buy vacation homes in US and therefore result in capital inflows to limit the depreciation. As long as US economy is a significant force amongst the global economies, USD is unlikely to become worthless.


Mahesh Godavarti
1

Chris, this requires a long answer.


However, the short answer is that if there are more dollars available per food item then the number of dollars that changes hands for that food item increases. Essentially, the value of a single dollar decreases (or the price of the food item increases).


This will keep happening as long as the treasury keeps printing more and more dollars.