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Paper Currency Is A Myth We Respond To

hyperinflationWhen money speaks we aren’t concerned with its grammar. Great! Some say that while money may fail to buy happiness it can certainly buy off unhappiness. I find these assertions funny but quite on target- Really? Reallllllly! Pete Wargent in an article for the Property Update talks about how money makes the world go round.

According to Wargent, Behavioural Economists found a paradoxical fact that people have lesser appetite for free things than they have for things they are charged for. Wargent presents the instance of a bucket-load of cheap records which found no buyers but got sold in no time once a label of $5 was put on each record.

Perhaps, it is because we place “worth” on the term money and its various representations, be it commodity currency or paper currency.

Barter cannot be a long-term solution

While barter would still facilitate transactions in a world sans money, it would not be able to provide a long-term solution. Hyperinflation-driven barter systems in Germany and Russia are ample proofs of failed attempts. By the way, great luxury when you can hand over coal lumps to ticket collectors at cinema theatres for a Federico Fellini or an Ingmar Bergman Movie.

Paper currency is a myth we respond to

Wargent next ventures into the classification of currency, pondering on the nature of fiat or paper currency. Its worth is held in its perception. If overnight, you lose faith in the fact that paper holds value, such currency would become obsolete. It is not gold or farmland which holds value per se. It’s a government created myth which we respond to. Long live dollars!

Degree of currency circulation hard to fathom

Wargent is not too keen on the practice of using paper currency because figuring out its exact degree of circulation can be a herculean task. Broadly speaking, it is the sum total of currency in bank plus deposit (current deposit+bank deposit) of the private non bank sector plus borrowings from the private non-bank sector minus currency and bank deposits held by the Non-bank financial institutions. Whoosh! I am not yet into the RBI liabilities so you get the idea.

Wargent is really critical of the situation and asserts that denouement of this great currency game will be a stage of hyperinflation which won’t be able to sustain the economy (once the economy fails to sustain it)….. much like the Ponzi scheme, which is sure to bleed one fateful day.

Commodity currency as against paper currency

Perhaps commodity currency can still be the succour or the kind of sustainable illusion (believing that all currency is an illusion) that we need. Farmlands, natural gas resources, gold and precious metals are not borne out of government whims, their value is unquestionable. Wargent signs off by giving real estate a thumbs up- “And finally, if none of that floats your boat, there is also commercial real estate and prime-location residential real estate.”

You can read the original article here.

Use of financial instruments to inject money supply

My problem is with the financial instruments that governments so often use to circulate more money or to siphon off money from circulation.  It is because the procedures are taken up as emergency measures and it is mighty difficult to stick to the intrinsic values or fundamentals of economics in those situations.

Quantitative Easing as an instance

Take Quantitative Easing (QE), as has been manifest during the Euro crisis, for instance. In a scenario when the monetary policies became redundant, government began injecting money supply by purchasing financial assets from commercial banks. QE failed to inject enthusiasm, what with demands not rising as expected due to the lukewarm approach of the lending institutions. On top of that, such policies can be harsher on deflation than expected.

Money set open the Pandora’s Box

In short, I want to say that we opened the Pandora’s Box the day we invented the paper currency. We will keep harbouring illusions and at times the selfsame illusion will keep us afloat but there will be crashes, here and there, and at those times, the failure of monetary reserves will test our moral reserves- and our ability to come back from the dead (both country-wise and on a personal level).