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Dear Dave or Jay

As you probably know, the official currency here in Ecuador is the american dollar. A few years back, we started making our own coins. I'm sure these coins will have no value in usa. So, how can we have dollars that only work in this country? How this is not counterfeiting?

Damn I was hoping this was going to be about magnets

A lot of country's currency only works in their home. Like the German mark or the French franc. A country can issue its own currency if it pleases.

Plus, you have to remember that the value of a currency is not in the worth of the materials of which they are made, but instead the perceived and expected value of it as a currency. So if the relative worth is 5 ctvs, then that's the worth of materials or services it will purchase.

And in the U.S. many foreign currencies are considered worthless, or at least reduced in value considering the trouble it would entail to convert it.

I mean about the economic process. Who backs this money? Ecuador do not have its own currency. They made these coins because there was not enough metalic change in the country when the "dolarizacion" happened.

makare said:

Damn I was hoping this was going to be about magnets

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They's magical an shit. Just like Giraffes.

The Ecuadorian (?) government purchases bundles of foreign currency (Probably American dollars and Euros) to back up the value of their dollars which, combined with natural resources, makes the coins kind of a 'promise' that the value is what they say it is. The world market will determine if that value is valid and will buy/sell ecuadorian currency according to how much is being created, what exchange rate works, etc. It's a little more complicated than that, but macroeconomically it's no different than any other country's minting process.

In large countries the reverse is true - rather than buying currency of another stable nation to back their own currency, they sell bonds to other countries and use that to print new money. This only works if people think you're going to pay back your bonds and interest when they mature.

It's essentially the same thing but the risk is placed on those who purchase the bonds, rather than on the gov't who buys the currency.

It used to be that countries would back their currency with gold, but the US stopped doing that in the last decade, and many other countries have followed suit.

Sounds like monetary value is one gigantic global ponzi scheme. I've actually always thought of the global economy as a big pyramid scheme too.

Mathias said:

Sounds like monetary value is one gigantic global ponzi scheme. I've actually always thought of the global economy as a big pyramid scheme too.

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Which is why there's a clamoring for the 'gold standard' which requires currency to be backed by physical stockpiles of gold. Otherwise it's too easy for countries to debase their currency through massive printing and selling schemes.

Adammon said:

Which is why there's a clamoring for the 'gold standard' which requires currency to be backed by physical stockpiles of gold. Otherwise it's too easy for countries to debase their currency through massive printing and selling schemes.

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So in other words, the GasBandits of the world are right?!?!?!


/clamps down on cyanide pill

Yeah, but the gold standard has its own set of problems.

All monetary systems are based on trust, even those backed by gold or some other commodity. It's a higher form of bartering, but it's still bartering at the core.
Added at: 16:55

Mathias said:

/clamps down on cyanide pill

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"I'm here with Mathias, and we've replaced his cyanide pill with cilantro oil. Let's see if he notices."

Camera zoom on face...

Mathias said:

So in other words, the GasBandits of the world are right?!?!?!


/clamps down on cyanide pill

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The gold standard was in place during some of the worst inflation in history, and the Reserve system has led to the longest periods of low inflation ever. So no, the GBs of the world aren't right. That said, there is something to be said about good government not fucking around with money too much.

Damn, you didn't even give GB a day to jizz over that one!

Krisken said:

Damn, you didn't even give GB a day to jizz over that one!

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Jizz-free zone.

You will sometimes hear that a currency has been 'pegged to the dollar.' That's what Cog is talking about. Currency is always pegged to something of worth, something everyone involved would want to trade (often gold or silver, but at times it has been salt, stone, shells, beads, livestock, etc). Modern money, by itself, is usually worthless (or close to worthless). Any value it has is merely because people have agreed to use it as a medium for transferring wealth between parties (see "fiat currency") rather than because it can be redeemed for any sort of commodity.

--Patrick

First Lady Puffinstuff said:

In large countries the reverse is true - rather than buying currency of another stable nation to back their own currency, they sell bonds to other countries and use that to print new money. This only works if people think you're going to pay back your bonds and interest when they mature.

It's essentially the same thing but the risk is placed on those who purchase the bonds, rather than on the gov't who buys the currency.

It used to be that countries would back their currency with gold, but the US stopped doing that in the last decade, and many other countries have followed suit.

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Not to get too nit-picky, but the US went off the gold standard 40 years ago in 1971 under Nixon, not a decade ago.

TheBrew said:

Not to get too nit-picky, but the US went off the gold standard 40 years ago in 1971 under Nixon, not a decade ago.

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Sorry, I meant to say century.

PatrThom said:

You will sometimes hear that a currency has been 'pegged to the dollar.'

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China does this, and it is one of the major reasons for our trade disparity with them.

The Chinese Yuan is a fixed currency but it's not pegged to the dollar exactly. The Chinese government decides what its exchange rate will be and that is what it trades for, instead of fluctuation in value based on market demands like the USD, Euro, Pound Sterling, etc. Recently due to international pressure, the Chinese government has begun allowing the value of the Yuan to fluctuate between certain boundaries.

Why does China manipulate its currency like this? Simple: the cheaper China's currency is compared to others, the cheaper its exports are and China really, really wants people to buy its exports.

Yeah. China was the first one that came to mind, but I thought they had decoupled it recently.

--Patrick

Never go to Cuba, their Peso convertible is worthless outside the country however within Cuba that is all they accept. Kick in the nuts? They value it 10 cents more than the Euro.