Ciao!

Well, believe it or not, there was a Fed before Green-span.

I wouldn't say most but some very important decisions affecting our daily lives are set by the Fed. Namely the price of money and the quantity available in the (now world) economy.

And another comment. We don't just take a dollar because it is a dollar, we take it because the full trust of the US government is behind it. We have, in theory, the assurance that a "state" cannot go broke, in the absolute sense of the word. Much less, when we talk about the US government.

So much for economics, the so called dismal science.

Oh, I know there was a Fed before Greenspan. And it'll go on doing what it does after him. It's just amazing that this guy has lasted through four different presidents!

And I think I do get the whole "faith and credit" thing about currency. But you have to admit that it *IS* all just smoke & mirrors, unlike a barter economy. If (and yes, it's a very big "if") anything ever happened, our currency would be worthless & we'd have to go back to Tulip bulbs or something. Not that that's likely. I just find the whole concept of imaginary value (which is really what fiat currency is, right?) a fascinating, intriguing thing.

If you think about it, a lot of what we find valuable is so because it has imaginary value- tulip bulbs, for example. So fiat money is no worse than anything else you can't eat or sleep under, except that the imaginary value we put to it is a promise by an social construct (unless you find the dollar as beautiful as a flower...)

Well, Miguel, I do share that fascination with you. Moreover, it is fascinating to think that that same money or green piece of paper we are talking about gets created "also" in its way through the banking system. Or just to think that with the raise of a tenth of a percentage point on one interest rate, the Fed can actually influence the behavior of hundreds of millions of people.

If anything happened to this system, I am guessing we would go back to salt, tee or coffee perhaps.

And lastly, I tell you, there are some handsome dollars out there. I have a golden dollar. It just looks pretty. ;-)

Fiat money? Base on faith? Its been inadvertently been based on oil since the oil crisis of the 1970's. Since the departure from the gold standard in the Nixon Administration, the dollar has essentially been tied to oil - the petrodollar. The US has been able to secure oil producing entities (Saudi Arabia, OPEC) to sell their oil in US Dollars creating a worldwide demand for dollars. Other governments need to keep billions of our currency in their Central Banks in order to be able to purchase the much needed fuel who only sell in Dollars. This creates an artificial demand for Dollars that is backed by a resource we don't even own (outright). Its genius really, but with the unprecedented deficit, debt and the introduction of the Euro, for the first time our monopoly of the dollar and its benefits are threatened.

Iraq switched from selling in dollars to euros shortly before we attacked pre-eminently. Iran plans to set up their own Oil/Natural Gas exchange this coming spring - and they plan to sell in Euros.

It is possible that the US could experience what Argentina experienced - a severe currency devaluation that could rock the economy and leave millions in poverty. Eventually though I think that American innovation will lead us back to becoming a nation of producers. What a coincidence Bush stated in his State of the Union that he will invest billions in math & science education - to foster our future economy to be based on our innovation - not on foreign oil.

Please see http://goldismoney.info/forums/showthread.php?p=162527#post162527

Google "Euro vs Dollar"

All differences aside, please tell me your perspective on the issue.

I guess a better explanation would be from Wiki's definition of the petrodollar and its reference links:

"A move away from the dollar towards the euro could have a disastrous effect on the US economy" because the US's negative balance of trade is largely offset by its role as a reserve currency.

http://en.wikipedia.org/wiki/Petrodollar

Buzz:

Well, aside from the pseudo conspiracy theory ... I remember that the US dollar was on the gold standard (many currencies are/were based on some gold/silver/other standard). Since the US went off the gold standard, the currency has been floating and is inconvertible (you can't go to a bank and get gold or silver or anything in exchange for currency).

The Euro, if I remember correctly, is also on a floating exchange, so it's also not based on any tangible resource beyond the faith & credit of the EU banks.

As for the dollar v. the Euro as a reserve currency: Yes, the dollar has been the world's standard currency for some time. But only in the decades following the Second World War. Before that it was the British pound (just as the "lingua franca" was once Latin, then French, now English). If it changes to the Euro, I doubt it'll mean more than simply a preference to use it over another currency. There has generally been a world economic superpower that tries to maintain the stability of the global economy (Pax Romana, Pax Britania, Pax Americana). After all, if the world economy collapsed, we could face a worldwide famine, or even a world war.

As for currency based on oil. I think that's an implied thing, simply because it's the world's most important resource. But time changes these things, centuries before oil important resources included spices (even today, Safron is worth more than its weight in gold).

Anyhow, not sure what else you'd like me to comment on.

MABB:

Worst case scenario, we'd go back to gold, at least a lot of people are betting on it. The price of gold is at record highs this past January.. and its been the only thing to maintain its inherent value in rough times.

Yes, I tend to agree with Miguel here. The dollar has become "the" currency in the world. As bozz says, one cannot buy anything in the world market without having dollars. I think it's that dependency on the dollar that is driving the story about the dollar being tied to oil. It is more probably a result of the dollar's universalty than a conspiracy from the part of the US government to tie it to oil.

As for the euro, it might seem that it is the new mighty currency, just because its value against the dollar has been strong. However, let's remember that part of the euro's sccess stems from the dollar's failure. The dollar's value has been going down, rather than the Euro's value heading upwards. That is one reason why the euro seems strong. Let's also remember that as soon as the euro was born, it took a plunge or a dive, which was highly expected by the analysts in the markets (both US and EU), yet not accepted by the governments. The euro was born a weak currency, because it comes from rather weak economies, if compared with the US economy. Underneath there are major complications in each of the core european country's economies. Some of these complications are endemic and particular to the euro zone.

Nevertheless, the euro is in direct competition with the dollar and if the trend keeps that way (humongous "twin" deficits problem in US), the euro will without a doubt become more desirable than the dollar.

And finally, I agree with you bozz, that in a worst case scenario, the world would go back to the gold standard, with all its defects and virtues. Just because in times of crisis people are not willing to experiment with something new. The'd rather go back to what they know, even if it is something not so optimal.

Miguel: As a Bolivian studying political science you simply MUST grapple with the implications of (modern, non-gold) money's value deriving from sheer fiat. State formation and economic development are self-reinforcing phenomena traceable to a chain of contingencies, i.e., not a situation in which outcomes bear a proportional relation to input conditions. "Nothing succeeds like success": tautological but true. Understanding hyperinflation as a "cascade effect" of the collapse of state authority was central to my dissertation at U.Va. One implication: Huge (but short-lived) payoffs to those (like Alan Garcia) who consciously exploit the collapse of the state via the printing press.