Currency devaluation explained with baseball cards
Another G20 summit is taking place (you might remember G20 from this post last year) and this time around, the major topic is the U.S.’s “forced” devaluation of the dollar thanks to QE2. Without going into the positives or negatives of quantitative easing (I’ll leave that to the politicians and finance experts), let me at least explain how printing additional money causes a devaluation of money and why other countries are bothered by it.
Imagine that Bob and Frank each bought a rare Americard baseball card – a Johnny Sluggo limited edition rookie card in which only 1,000 were printed. Friends, relatives, and collectors everywhere want to get their hands on them. Whether it’s monetary, social, or otherwise, there is a major value to the cards and Bob and Frank are pleased with their investments. Then, Americard decides to print 1 million more Johnny Sluggo cards to earn some extra money. Suddenly the limited edition isn’t so limited and the value of Bob’s and Frank’s card have plummeted.
The baseball cards are the currency, Americard is the U.S., and Bob is China. Frank? Well, he’s just Frank, everyday American. Sure, Bob can print his own cards, but nobody wants those because, at least up til now, everyone only wants to trade Americard baseball cards. You can see why Bob and Frank are ticked off.
Americard is getting dangerously close to overexposure, though, and if they keep printing cards, suddenly Frank and the others are going to start taking Bob’s small baseball card company more seriously.
The lesson: you can’t manufacture value without devaluing something else, or more simply, “you can’t get somethin’ from nothin’.” One last way to look at putting “new” money into the market is comparing it to a stock split. Companies often split their stock when the individual security price gets “too high,” hoping to make it “more affordable” for investors. Eight full slices of pizza is the same thing as 16 half-slices, though, so value hasn’t been created, but the value of an individual share (or slice) has decreased, just like the dollar. Now if you’ll excuse me, I’ve got a closet full of baseball cards to look through.
Get The Wall Street Journal for 75% off!
Read on:
Bloomberg.com – G-20 Nations Wrangle Over Strengthening Vow on Currencies
Time.com – G20: Why Failure Wouldn’t Be the End of the World (editorial)
(image taken from newamerica.net)
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment