Bloomberg News: Money Is Losing Its Meaning
Article by Jared Dillian in Bloomberg News
Doing “whatever it takes” to save the global economy from the coronavirus pandemic is going to cost a lot of money. The U.S. government alone is spending a few trillion dollars, and the Federal Reserve is creating another few trillion dollars to keep the financial system from collapsing. A custom Bloomberg index measuring M2 figures for 12 major economies including the U.S., China, euro zone and Japan shows their aggregate money supply had already more than doubled to $80 trillion from before the 2008-2009 financial crisis.
These numbers are so large that they no longer have any meaning; they are simply abstractions. It’s been some time since people thought about the concept of money and its purpose. The broad idea is that money has value, but that value is not arbitrary. Former Fed Chairman Paul Volcker once said in an interview that “it is a governmental responsibility to maintain the value of the currency they issue. And when they fail to do that, it is something that undermines an essential trust in government.”
The dollar has no real intrinsic value, backed only by the full faith and credit of the U.S. government.
Under a fiat currency system, the government says that a dollar is a dollar. Its value relative to things such as other currencies and gold is determined on global markets. Gold is considered to be an objective store of value, and the metal’s rise in dollar terms can be expressed another way, which is that the dollar fell in gold terms. That implies the market has rendered a decision on the value, or rather, the purchasing power of the dollar.
The three main functions of a currency are as a unit of account, a medium of exchange and a store of value. It is that last function that is most important. Ideally, a central bank would want its currency to retain its value over time. The era of flexible monetary standards, however, allow central banks to manipulate a currency’s value to help fight recessions as well as smooth out and lengthen business cycles at the expense of inflation. But even low inflation, say on the order of 2%, will greatly erode the purchasing power of a currency over time.
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