We’re migrating some posts from the old economics forum to our blog. This is one from 2007.
I have been discussing with my friends on how some currencies compare against USD. For example, the Kuwaiti Dinar is the most expensive currency in the world (1 KWD = 3.55 USD = 1.77GBP).
Also, 1 US Dollar = 1.87208 Brazilian Real. However, before Brazil introduced new Real in 1994, you could get a lot more of the old currency for 1 USD. The new Real just divided the old currency by some factor.
So, just because a currency will buy you more dollars than another one doesn’t mean that economy of that country is better. It might be true in some cases but doesn’t have to be true all the time.
So, my questions is … since a British Pound is worth more than US Dollar … what does that say about the British economy compared to the US? Since pound is worth more than dollar there is just less pound to go around to balance it out?
There’s not simple answer to your question. The pound is worth more because of its power, it can buy more goods. However, the change in prices as you see in say the real is due to a perception of supply and demand. When you revaluate or print new money there is an assumption the new money will be more ‘trustworthy’ than the old currency (or more specifically the new economy generally introduced by a new regime). This new ‘optimism’ can encourage investors (foreign investors) and thus increase demand for domestic currency. Right now America is tanking because people are opting for other foreign currencies and investments. That will change no doubt.
Unfortunently….well maybe fortunately, currency that is exchanged today does not have value in and of itself, like a commodity does. And unlike a couple of years ago when currency was backed by a gold standard or just plain “standard” of some sort, currency today is dependent upon the supply of the coinage controlled by that government as well as the perception of worth. The “power” you speak of is all a perception, and the more people believe that perception the more worth and value the currency has.
Technically the American Dollars and many other currencies are in fact backed by a gold standard. Today in 2009 gold is up so high because people have less faith in the fiat money. When you peg to international currencies then sometimes that indicates you really don’t have much other than perception.
I agree with b6zulu, the currency itself does not have any value unlike commodities like gold and Silver. It is all in how it is perceived by the people. The people are what gives a certain currency its worth and another less worth. The fiat monies come and go and there are many people that always lose everything when this happens. The U.S. Dollar is not going to be an exception. However, Gold has always been here and always will be here. And also, the U.S. Dollar is not backed by a Gold standard. This ended a long time ago.
What sort of actions (if any) can the government take to help raise people’s perception of the USD?
Iraqi Dinar is very real, but the pitch many Dinar dealers try to send your way is far from reality and designed to get you buy from them. Some of these dealers even go as far as to explain that they are trusted by the government and supply you with a document to reinforce this illusion.
First, the US government requires a business (or anyone for that matter) to register with them when selling any kind of currency. Once you register, the US Government will send you a letter confirming your registration. IT DOES NOT mean that they trust or vouch for the company, only that they complied with the law.