Nearly every one has heard of the economic laws of supply and demand. I am pretty sure you have heard it said, "supply and demand are what determine price". This is, with certainty, truth, to an extent. Say what? To an extent? How can that be?!
Thousands of years ago, humanity for the most part, lived under a barter economic system. For example, I am a farmer who grows wheat. My friend who lives along side a major river, fishes for a living. I have something to trade, and he has something to trade. I can trade a measure of wheat for some fish at a level that we both feel is an equitable trade.
Now the problem with this kind of system is that economic calculation is nearly impossible. Who made out like a bandit, and who gets ripped off? Someone who really likes fish might say "That was a good trade for the wheat farmer.", while someone who does not like fish might say "Call the cops! He got ripped off!" So who is to say who really benefited from this trade? No one really can. Another good point to make is that it sure would be quite cumbersome to carry around a bunch of wheat all the time, not to mention that it could spoil and rot and thus be no good. Think about what happens to fish when it spoils!
Eventually, a new economic system had to be developed, and one did emerge. It is called the MONETARY system. Now money, by my definition, is:
#1. a medium of exchange. Instead of directly exchanging one good or service or another, we are using an indirect exchange - a medium if you will.
#2 the money must be relatively abundant, but relatively scarce. (example: Rhodium would not be abundant enough and hold too much value, where grains of sand would be too abundant and hold too little)
#3 the money must easily be portable or taken from one location to another.
#4 money must also be easily divisible, and each divided piece must add up to be equal in value to the whole. example: four US quarters equals one US dollar. A merchant will accept a paper dollar bill as readily as the four quarters because they represent the same amount of purchasing power.
#5 the money must hold a relatively steady value to prevent all economic calculation from becoming too skewed.
Now back to my example, now that I as the wheat farmer, have a medium of exchange, I can receive that money instead of things like fish and exchange that money for something else with someone who would otherwise not have a need for my wheat. But, unlike the barter system, I am now dealing with an additional economic entity besides the wheat I am trading and the good I am trading it for, that is the medium of exchange, money. The fact of the matter is that the money is its own economic entity with its own supply and demand fundamentals.
CONCLUSION: That means that ultimately, it is not just the supply and demand fundamentals of the good/service you are exchanging it for, be it a service, commodity, bond, company stock, even another currency, but also the supply and demand fundamentals of the MONEY ITSELF you are using.
Case in point: Gasoline. It has been rising in dollar terms since October 2010 and is up over 45% since then. Has the demand for gasoline increased by that amount since then? Hardly!! Yet the dollar you are buying it with has declined against all major currencies during that same time period! You can pretty much do this for just about every other necessity for life.
Nobody can seem to explain exactly why gasoline is going up, but I just gave you the answer. It is not just because of "middle east tensions" or "greedy oil companies", but it is also the fact that the value of the dollars the gasoline is being traded with is going DOWN. (In fact the oil company is anything BUT the reason why for the high price in gasoline. The company needs to make money or else otherwise you will have no oil company and thus no gasoline. Those record profits? They are priced in depreciating dollars too!)
In fact it has been going down since the year 1913!! The two main reasons why the dollar can still be exchanged for a reasonable amount is because all the other currencies of the world are also going DOWN as well.. only at times the dollar goes down faster or slower than say, the euro, the British pound, or the Japenese yen for example. The other reason why is that worldwide up to this point, all commodities are pirced in dollars. (Hence the "worlds reserve currency")
But why this race to the bottom in terms of value of currencies around the world? The answer to that question lies in the type of monetary system we have today in and of itself, which is probably going to be the subject of my next blog post.
One last thing I am going to leave you all with: When I was working at a job in 2009 in the break room, there was a change machine where you could change $5, $10, or $20 bills into $1 and $0.25 coins to use in the snack machines. One night it was apparently broken as it would not take my bill. I wrote on a note "BROKEN. WILL NOT ACCEPT CURRENCY!" A friend of mine saw the note and asked me "Is that Russian, English, or European currency?" I explained to her that our money is not really money, but a CURRENCY because money is supposed to HOLD and STORE my value for a later date, and our CURRENCY fails miserably is doing so.
My friend promptly agreed with me!
