Depreciation of money is Will there be a depreciation of money?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

As anyone who has studied political economy knows, money is a commodity, albeit a very specific one. This concept has come up with many definitions, from highly scientific to humorous, but their essence does not change from this. Money, in Marx's words, is a receipt for the right to exploit the labor of others. Moreover, as long as they are minted or printed, such exploitation will exist. And there will always be people who have more than others. And the fight for power is inextricably linked with the struggle for money. Mankind invented equivalent units for its own convenience at the moment when commodity relations arose. In the conditions of the modern market, complicated by intricate international financial and credit relations, depreciation of money occurs in different countries. This phenomenon, depending on the degree of the process, is called differently: inflation, hyperinflation, default, stagnation, and even the complete collapse of the economy. What are the mechanisms behind these processes?

Inflation

The purchasing power of any currency decreases over time. And it's not even about the currentnow the Jamaican world monetary system, based on floating rates - it just regulates the ratio of the value of various banknotes. If we evaluate how, for example, the US dollar has lost its solvency over the past three or four decades, it turns out that we are talking about its multiple fall. The picture is the same with the Swiss franc or the Japanese yen. The gradual depreciation of money is called inflation, the reverse process is called deflation, which economists also consider a negative phenomenon. The mechanism of these phenomena is quite simple. As the economy grows, there is more and more money in circulation, and the values provided by the market in exchange for them become consumer accessible. All this is the engine for further development. Inflation in the range of 2-3% is considered normal and even desirable.

Hyperinflation

As long as world currencies were backed by gold reserves, that is, during the period of the Genoese and Bretton Woods currency systems, inclusive, both exchange rates and prices remained relatively stable. Of course, there were crises and depressions, sometimes very painful, but the dollar (and even the cent) remained in value, it was just very difficult to earn it. But in countries that lost their gold reserves (like Germany after the defeat in the First World War), there was a rapid depreciation of money. This phenomenon was expressed in hundreds and even thousands of percent, and in a month it was possible tobuy a pack of cigarettes, or even boxes of matches. Something similar happened to the former citizens of the suddenly collapsed Soviet Union. Such an avalanche-like depreciation of money is called hyperinflation. It is due to the complete or large-scale collapse of the financial system of the state, expressed in the uncontrolled printing of unsecured bank notes and banknotes by the Central Bank.

Default

This term, new to our ears, burst out of the blue in 1998. The state announced its inability to meet its debt obligations, both in the foreign economic sphere and within the country. This moment was accompanied by hyperinflation, but in addition to it, the citizens of the former Soviet Union also felt other “charms” of default. Store shelves immediately emptied, people sought to spend their savings as quickly as possible, while they could buy something else. Many enterprises, whose activities were to some extent connected with the banking sector, went bankrupt. Interest rates on loans skyrocketed. Doing anything other than reselling became unprofitable, then unprofitable, and finally simply impossible. Default is the depreciation of money caused by the complete loss of confidence in the national currency in the domestic and foreign markets. It is usually caused by systemic errors in the management of the country's finances. In other words, a default occurs when the government spends more than the national economy can handle. Depreciation of moneyin Russia, and then in other former republics of the USSR, there were other reasons related to the general division (between those who had access to this process) of the we alth of the destroyed great country. The "classic" default occurred in Mexico (1994), Argentina (2001) and Uruguay (2003).

Inflation and devaluation

The increase in domestic prices in countries with underdeveloped and inefficient production is directly related to the collapse of the national currency. If the percentage of consumed goods has a high import component, there will certainly be a depreciation of money. This is due to the fact that the purchase of all the essentials is made for world currencies, in particular, for US dollars, against which the exchange rate of the national currency decreases. In countries that are less dependent on external supplies, with high levels of devaluation, inflation is observed only in the range of imported goods and that part of domestic products that use foreign components in production.

Positive aspects of inflation…

Inflation, even of a significant size, has on economic processes not only a detrimental, but sometimes even a healing effect. The outstripping price growth encourages the holders of savings not to store rapidly dwindling stocks “in stockings”, but to put them into circulation, speeding up financial flows. Operators are leaving the market for whom the depreciation of money is a detrimental factor due to the low efficiency of their activities. Only the strongest remainhardy and durable. Inflation plays a sanitary role, freeing the national economy from unnecessary ballast in the form of weak enterprises and financial and credit institutions that are unable to withstand competition.

… and default

It may seem paradoxical to think that even the complete collapse of the national financial system is beneficial, but there is a rational grain in it.

Firstly, the depreciation of paper money does not mean that other assets lose their value. Enterprises that have managed to maintain their production potential in the face of severe shocks are becoming the objects of increased attention of foreign and domestic investors.

Secondly, the state, which has declared its insolvency, is temporarily freed from annoying creditors and can focus its efforts on the most promising sectors of the economy. Default is a great opportunity to start from scratch. At the same time, creditors are not at all interested in the death of a bankrupt, on the contrary, they, as a rule, seek to help the debtor in order to receive their money at least partially later.

Forecasting

No matter how economists comfort ordinary citizens, pointing to the positive aspects of the crisis, but the ordinary average man is not happy with the prospect of losing savings, reducing solvency and the general standard of living. He is concerned about whether there will be a depreciation of money, under what conditions it will occur, and what to do to get out of this situation with the least losses. Well, the world, likethe national economy, despite its apparent complexity, operates according to fairly simple principles. The stability of purchasing power and demand is influenced by factors that, if desired, everyone can learn from open sources. The size of GDP, gold and foreign exchange reserves, the amount of external and internal debt, and most importantly, the dynamics of their changes - these macroeconomic parameters speak volumes. Everything here is like in an ordinary family: if more money is spent than earned, then sooner or later the trust of creditors is lost, and collapse occurs. If the situation is reversed, you can sleep peacefully.