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Originally Posted by willravel
The problem is that the market determins what the dollar is worth versus the euro or yen, but it doesn't actually give the dollar worth.
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It is true that the government declared the dollar to be legal tender. However, it is the market that determines if it has value. The intrinsic value of a dollar is virtually zero and it is the market that has faith that the dollar has value as an exchange medium. In one respect what you say is true, but I stand on my point that the market determines the value of a dollar.
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What *should* give it worth is the gold or silver backing somewhere.
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Why?
There is no inherent reason that exchanges in any market be backed by gold or silver.
Look at the EBAY market. That kind of market could easily get to a point where no dollars are ever exchanged. If the participants in that market wanted to exchange good and services in PayPal credits, why would those credits need to be backed by gold? In my view there is no need.
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The idea of the dollar is that it represents a bank note laying claim to precious metals heald by the government. If the government no longer backs to dollar, the dollar no longer has worth.
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I think the market determines if the dollar will have worth as an exchange medium. When I go to a casino they give me chips as an exchange medium. those chips are not sanctioned by the government but certainly have value. The value is based on the faith I have in the "casino" market. As long as I am in that market the chips have value. I agree that if the government created a new currency, the dollar would be devalued. The full faith and backing of the US government gives the dollar credibility.
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There is a finite amount of worth in the world.
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Says who? We have not come close to taping the full potenetial of human knowledge and productivity. As long as we can do things better and gain more knowledge there is no limit to the "worth in the world".
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If there is more currency in the world than there is worth, then the whole thing collapses and we go back to bartering for coon skins again.
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True if the government prints money with no limit we would have hyper-inflation. But hyper-inflation doesn't mean the value of goods and services disappear, its just that everything costs more relative to that currency. That then becomes a hedging game, because in a hyper-inflation enviroment the people who have hard assets wins, but converting those assets to other usable services or assets becomes a challenge.