The Dollar Has No Value

I often hear, “The Dollar has lost 95% of its value”, or “If we print any more, the dollar will be valueless”. Im here to set things straight. The dollar has NO value. It can’t gain or lose any value. Why? Because its just a piece of paper. When we were on the gold standard, the dollar did have value, but not anymore.

So what does the dollar (and any other fiat currencies) have if its valueless? The Dollar has buying power which is determined in the markets through a modern floating exchange rate system. The buying power and stability of the US Dollar is determine by a couple of things.

  1. Taxation: The government taxes in dollars. If you try paying your taxes in something else, good luck. You will be likely sitting in jail if you do not pay taxes in dollars. This is what gives the dollar its stability.
  2. People’s trust: Of course, the citizens of a state can get up at any moment and riot against the government, which would mean they no longer trust the nations currency (be it from too much “printing” or another reason).
  3. Currency Management: Simply put, this is the government’s control over the currency.
  4. Productivity: The productivity of a nation is what determines the currency’s strength or weakness.
Here is a graphic showing part of this relationship, thanks to Pragcap.com
So how does buying power increase and decrease? Obviously it is determined by the market, but why would it go up or down? Because the US Dollar’s buying power is determined the by the productivity and efficiency of the United States. When the productivity and efficiency of a nation drops, so does that nations currency. Obviously this is not the only determining factor, but this is, in my opinion, the biggest stabilizer of the currency. Lose your nations productivity (like Weimer Germany did for example) and your nation will los its’ currency’s strength (which is followed by inflation).

So what does taxation have to do with this? We have to pay our taxes in US dollars. If you don’t, there is a high likelihood you will be sitting in jail not too long after. And because of this, the dollar is accepted by everyone, whether you like it or not. Simple as that.

Obviously there can come a point where the people rebel against the government. This could come from many things. But unless the government has run amok where inflation has skyrocketed (likely meaning there is high levels of corruption in the government), then there is no reason to think the currency would collapse. Even in today’s Eurozone crisis, people are still going to accept the Euro, because they are not protesting against the government. They are protesting against the  government’s action (Austerity,etc). Those are two different things.

One last thing that determines buying power is how the currency is managed. If we “print” or “spend” (essentially the same thing) too much, then inflation could increase and thus the buying power of the currency would in turn decrease. Now a couple of things about this. We need to understand how much money is actually in the economy in order to determine if we are “printing” too much.

The chart below shows, that relative to our economy, we have not done as much printing as this money supply chart shows. All those dollars are really just sitting there in the excess reserves (waiting to be lent out). So we can increase our reserves as much as we want, but as long as it does not enter the economy (which it has NOT), there is no real “printing” going on. Obviously if the new dollars do get into the economy and there is no reduction if inflation gets too high, then the currency is mismanaged and will lose “buying power”.

To Understand more on this concept of our fiat dollar, please read the section from Cullen’s MMT primer titled “What Gives Fiat Money Its Value? ” from Pragcap.com. There is a SUPERB example to theater tickets.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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Jerry Khachoyan Blog