How is US currency worth anything?

[ponderingturtle]

With sanctions, Iran does have a problem getting money in and out of the US, so it may be in their interest to abandon the dollar, both as a practical matter and a stab in the eye of the Great Satan. (Should the "the" in "the Great Satan" be capitalized?)

My point is that the US is still a good place to invest, and pulling out tens to hundreds of billions of dollars, just for a public relations 1-day paper headline, isn't gonna sit too well with those selfsame dictators who own those billions.

Also haven't certain court cases meant that any assets that the Iranian government does have in the US will likely be seized?

I remember hearing about that with regards to some antiquities.

 

[CaptainManacles]

The liquidity of cash money is itself valuable. Liquidity is not tangible, but is nonetheless valuable. It can be rapidly exchanged for anything, whereas less liquid assets are more troublesome.

But this is circular reasoning again. It's liquid because it can be traded fast. But it couldn't be traded at all unless it has value. So where does that initial value come from?

 

[Suddenly]

Is there some definition of "value" that I am missing?

Seems there is a flavour of Marxism to the whole "where is the value" argument. The value is that other people will exchange it for things you need. Nothing whatsoever has intrinsic "value."

Just like a thing is "worth" what someone will give for it.

"Value" and "worth" are in the eyes of the beholder, period. Saying something has "value" because others will accept it in trade is no more circular reasoning than saying something is "worth" what other people will pay for it.

 

[ponderingturtle]

But this is circular reasoning again. It's liquid because it can be traded fast. But it couldn't be traded at all unless it has value. So where does that initial value come from?

Because it is useful to everyone to recognise that value. Where does the value of a chair come from?

 

[stilicho]

Hence Taiwan is a show issue rather than a real thing. They have no incentive to "bring it to a head" with a showdown. China "cutting off" the US will hurt their political class's self-enrichment program, and is unneeded to maintain power.

This is an important point. I have witnessed on JREF and other forums more than once some external threat that China presumably poses (Taiwan, Vietnam, Siberia).

The fact is that China is not so disposed to undertake any of these adventures and clearly would prefer that the USA take the responsibility of "maintaining order" as it were. The last thing they want is for Beijing '08 to turn into Moscow '80.

 

[stilicho]

But this is circular reasoning again. It's liquid because it can be traded fast. But it couldn't be traded at all unless it has value. So where does that initial value come from?

Its chief value comes from its stability and its usefulness as a medium of exchange. Do you observe neither of these qualities in the USD? What option would you propose as more satisfactory to your whims?

 

[egslim]

Dollars still are holding their value inside the US, which is what it's all about anyway.

Not if you buy imported goods. In addition, people (and the government) spending more money than they receive drives up prices because it means demand exceeds supply. That creates inflation.

To pull dollars out means you have some place better than the US to put them.

Actually you do. Suppose you and me each had a million dollars five years ago. I exchanged them for Euros, while you kept the dollars. Today I exchange my Euros back into dollars, and I have a lot more money than you do.

China's government is, like any other dictatorship*, about enriching their political class.

Wrong, and this is a crucial point: A government's priority may be power, prestige or money. In rare cases perhaps even idealism, but that's irrelevant. The point is that history is filled with examples of governments preferring prestige or power over enrichment.
What good is money to a dictator who can get anything he wants anyway?

 

[egslim]

The fact is that China is not so disposed to undertake any of these adventures and clearly would prefer that the USA take the responsibility of "maintaining order" as it were. The last thing they want is for Beijing '08 to turn into Moscow '80.

Short-term, I agree. Long term, I don't. As China's relative economic power grows it is only natural they will want to expand their sphere of influence. Think 20 years from now.

 

[WildCat]

Short-term, I agree. Long term, I don't. As China's relative economic power grows it is only natural they will want to expand their sphere of influence. Think 20 years from now.

As they gain in economic power their people will want more freedoms, no wealthy populace has ever been satisfied with dictators. Dictators do better with the uneducated and the poor.

Assuming this continues to hold true I really don't fear a China I think is likely to be benign.

 

[gnome]

As they gain in economic power their people will want more freedoms, no wealthy populace has ever been satisfied with dictators. Dictators do better with the uneducated and the poor.

Assuming this continues to hold true I really don't fear a China I think is likely to be benign.

For all the things we tend to disagree on, you've hit on something that I believe very strongly.

 

[UserGoogol]

But this is circular reasoning again. It's liquid because it can be traded fast. But it couldn't be traded at all unless it has value. So where does that initial value come from?

Value comes from the fact that people percieve money as valuable. Which is of course completely insane from a common sense point of view, but it works, somehow. I suppose the gold and silver standards might have been necessary to instill confidence in the first place, but there is a sort of inertia to confidence. Once people trust money, they'll keep on trusting it even when their original reason for trusting it goes away. It's not just stupid emotions either, since even though you can't redeem dollars for gold, you can redeem your dollars at billions of other stores across the world. In principle, there could always be some sort of mass-collapse of confidence where everyone suddenly panics and tries to get rid of their money as soon as they get it, but in practice that seems to only happen when governments do something really blatant to make people lose their confidence in money.

 

[Puppycow]

Actually you do. Suppose you and me each had a million dollars five years ago. I exchanged them for Euros, while you kept the dollars. Today I exchange my Euros back into dollars, and I have a lot more money than you do.

But how does one know which will be worth more in 5 years? Sure, now the dollar is falling, but the next 5 years may be different. Other 5 year periods in the past have been different. Speculating in currency trading is risky. If you were investing your money for the next 5 years would you put it in cash euros? At least you would be smart to invest in bonds. And if the dollar bonds have a higher interest rate, the dollar might be attractive unless you think it will fall further. At some point the dollar's fall will bottom out. No one knows where. Maybe it already did. Maybe it will soon. Maybe it has a lot farther to fall. Maybe this is a temporary abberation and the euro will return to the early 2000's levels again.

 

[Puppycow]

If anyone is convinced the dollar is going to fall, and just "knows" this to be true, I'm pretty sure you could make a bet against the dollar by investing in any number of things. Invest in commodities for example, or another currency.

Other things that have no or little intrinsic tangible value, but nonetheless have value because people think they have value: a baseball game, a painting, a diamond ring, gold, etc.

 

[egslim]

As they gain in economic power their people will want more freedoms, no wealthy populace has ever been satisfied with dictators.

Before the war, the Italian people were quite happy with Mussolini. And a number of wealthy Middle-East oil states aren't very democratic either. As far as their people are unhappy, they want a more theocratic state as opposed to a more democratic one. So enough counter examples to disprove the above.

More importantly, it is irrelevant. Because nationalism creates popular support for expanding a country's sphere of influence, as much as a politician's quest for power and prestige.

Assuming this continues to hold true I really don't fear a China I think is likely to be benign.

That depends. Assuming China develops economic power comparable to the US, the country will no longer accept playing second fiddle to the US in their own backyard. Nationalism will guarantee that, whatever type of government they have.
If at that point the US agrees to step back, then I agree China's actions will be benign. But if the US tries to stand ground it will lead to a confrontation.

 

[egslim]

But how does one know which will be worth more in 5 years? Sure, now the dollar is falling, but the next 5 years may be different.

The top graph at this link shows the dollar has been in almost continuous decline against other currencies since 1969. This trend is the result of US policy, so unless that is changed radically, the dollar is very unlikely to recover.

If you were investing your money for the next 5 years would you put it in cash euros? At least you would be smart to invest in bonds. And if the dollar bonds have a higher interest rate, the dollar might be attractive unless you think it will fall further.

With the possible exception of a slight uptick, it will fall further, as it has done since 1969. And the "credit crunch" that leads to lower interest rates won't help matters.

Edited to add:
To stop the dollar's decline you can raise interest rates. But since the US is so heavily in debt (both government and consumers) that would hurt GDP a lot. Alternatively, you could decrease the trade deficit through higher taxes or import tarrifs. But that would hurt GDP as well. Any other suggestions?

 

[69dodge]

Is there some definition of "value" that I am missing?

Seems there is a flavour of Marxism to the whole "where is the value" argument. The value is that other people will exchange it for things you need. Nothing whatsoever has intrinsic "value."

Just like a thing is "worth" what someone will give for it.

"Value" and "worth" are in the eyes of the beholder, period. Saying something has "value" because others will accept it in trade is no more circular reasoning than saying something is "worth" what other people will pay for it.

I value food. But I don't care whether anyone will give me anything in return for it. I don't want to give it away. I want to eat it.

Money is different. If no one else wanted money, it would be useless to me. But if no one else wanted food, I'd still need to eat.

I think a reasonable definition of "intrinsic value" is that it is possesed by things you'd want even if you knew you couldn't trade them away. It's true that people may disagree about it; not everyone wants the same things. But no one would want money if they couldn't trade it for something else.

 

[Kerberos]

I value food. But I don't care whether anyone will give me anything in return for it. I don't want to give it away. I want to eat it.

Money is different. If no one else wanted money, it would be useless to me. But if no one else wanted food, I'd still need to eat.

I think a reasonable definition of "intrinsic value" is that it is possesed by things you'd want even if you knew you couldn't trade them away. It's true that people may disagree about it; not everyone wants the same things. But no one would want money if they couldn't trade it for something else.

You could take that stance, but the fact is that actual value is far more meaningful than intrinsic value. Also other candidates for currency such as gold, don't have much intrinsic value either. It does have some practical uses, but primarily it is for a) currency and b) showing off. Diamond, expensive cars, nice clothing and lots of other things also have value primarily because they're perceived as having value, rather than for any "real" reason. Granted they're not meant for trade, but their value still lies in the realm of perception rather than substance. Trying to distinguish between real value and non-real value becomes extremely mucky very quickly.

 

[Seismosaurus]

How is a currency worth anything? Because people decide that it is. Saying a currency has worth because it is backed by gold or whatever is a nonsense - it only raises the question of why gold is worth anything - which again is because people have decided that it is.

Or so it seems to this non-economist.

 

[ServiceSoon]

Why everybody is so concerned about the American dollar when clearly the Amero will be the new currency is beyond me If you haven't figured that out by now you should change your hobby from skeptic to knitting

 

[WildCat]

How is a currency worth anything? Because people decide that it is. Saying a currency has worth because it is backed by gold or whatever is a nonsense - it only raises the question of why gold is worth anything - which again is because people have decided that it is.

Or so it seems to this non-economist.

But gold is shiny!