Types of Currency and Inflation
When we talk about currency, we mean the medium of exchange that is used for the purchase of goods and services. There are various types of currencies available including free floating and commodity based. We will discuss some of them and the inflationary effects that can occur when more money is printed.
Fiat currencies are a type of currency that is not backed by physical assets such as gold. They are created by the government and are issued by the country’s central bank.
This system allows a government to control the supply of money, which gives the government more control over the economy. However, it also enables the government to create too much money, leading to inflation.
Inflation is a natural phenomenon that occurs when prices rise. During periods of economic growth, inflation is typically about two percent. When this rate falls, it is called deflation. Deflation can be disastrous for businesses. It can lead to companies cutting costs and laying off workers. The domino effect can result in a large economic crash.
However, in extreme cases, a fiat currency can experience hyperinflation, which can cause the currency to fall in value. Countries with overprinted currencies may experience the worst case scenario.
The value of a fiat currency depends on the country’s economic performance and governmental fiscal policies. As a result, a fiat currency is vulnerable to bubbles.
Commodity-based currencies are currencies tied to the prices of commodities. The Australian dollar, New Zealand dollar, Russian ruble, Chilean peso, Norwegian krone, and South African rand are just a few examples.
The commodity-based money system has some advantages over the fiat currency system. There are fewer constraints on its supply. But it has the potential for greater volatility. Its value will diminish if the commodity becomes cheaper to produce.
In order for the commodity-backed money system to work, the currency must be able to satisfy the needs of a society. If it cannot, its value is unlikely to be stable in the long run.
A commodity-based currency is also subject to periodic recessions. These can result in deflation and lower GDP. Some currency systems have experimented with time-based units.
One example is the Exeter Constant, which was an experimental currency in New Hampshire in 1972-3. It was based on the price of thirty commodities.
Another is the gold standard, which allows currency holders to exchange their currencies for a certain amount of gold. As you can imagine, gold has limited intrinsic value.
A free-floating currency is one where the exchange rate does not have a fixed path. In other words, they can vary from day to day, depending on a number of factors, such as interest rates and market sentiment.
There are two types of free-floating currencies. The first is the fully flexible system, while the latter is the more controlled type.
Both have their respective advantages and disadvantages. Flexible exchange rates, for instance, give a country valuable monetary-policy independence, and at the same time offer a certain amount of financial stability. However, in a trade environment dominated by the US dollar, such systems may be limited in their ability to support full employment.
It isn’t a bad idea to learn about both types of exchange regimes, especially if you’re looking to invest in the foreign exchange market. For one, the currency’s value can fluctuate dramatically, affecting foreign direct investment in a positive or negative way. On the other hand, the government can intervene from time to time to keep the currency favorable for global trade.
Inflationary effects of printing more money
Inflation is a broad increase in the price of goods and services across an entire industry. It can be caused by any number of factors, but is most commonly linked to an increase in the money supply.
Inflation occurs when the supply of money increases faster than the growth in economic output. This is known as hyperinflation. Hyperinflation can occur when the rate of inflation is greater than 50% per month or 10% per year.
The Federal Reserve has been expanding the supply of money for decades. However, this expansion has picked up in recent years. With more people working and more cash in the economy, households should have more money to spend on goods.
When prices rise, the purchasing power of money decreases. During periods of high inflation, the wages of workers increase very quickly.
Deflation is another form of inflation, but it does not involve a change in the money supply. It can be a result of a recession. When an economy goes from an expansion to a recession, many people lose their jobs. People can also lose access to cheap credit.