| The Forex Trade |
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| Written by James Pynn |
| Sunday, 01 November 2009 19:11 |
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Given the wretched state of the economy, it is essential every American understand some fundamental economic principles. Economics was a subject I cared little for and did everything I could to just pass. But, a year now into the so-called recession and the number of unemployed Americans is in double digits, learning the bare economic minimum is crucial. The first issue I decided to learn about was the gold standard. I use the past tense because Richard Nixon discarded the standard on August 15, 1971.
Given the wretched state of the economy, it is essential every American understand some fundamental economic principles. Economics was a subject I cared little for and did everything I could to just pass. But, a year now into the so-called recession and the number of unemployed Americans is in double digits, learning the bare economic minimum is crucial. The first issue I decided to learn about was the gold standard. I use the past tense because Richard Nixon discarded the standard on August 15, 1971. Before we go back in time and understand the history involved, let's get the concept of the gold standard down. It is defined as, "A commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." Basically, the gold standard was embraced in an effort create an even playing field across all national economies. In its past, the United States has embraced two precious metals in turn: gold and silver. Both metals were used to peg the value of the dollar thanks to the Standard Act of 1900. Now it's important to also know that whenever there is a recession or depression, central banks hate having such a shiny standard. What they like doing in such dire times is print more money giving the immediate illusion that markets are holding fast and steady. They don't like having to worry about a standard to uphold because that only slows the printing presses. But that's not how it works. Governments, and the central banks that rule their economic policies, are fond of printing more money. When one powerful economy, like that of the United States, begins to print more money, so too, in most cases, do the banks of foreign nations. This had and still has -- a tremendous affect on the Forex (or Foreign Currency) markets. To keep parity with the dollar, they must print more or less money. Since 1971, every major currency worldwide has become a fiat currency, that is, it has no intrinsic value. It is only as valued as it is accepted for goods and services. The hidden danger involved is in the inflation that arbitrary printing causes. It has been estimated that the buying power of a 1971 dollar is now roughly eight cents to the dollar. Without a peg to the dollar, the Fed can print as much as it wants, thereby causing a massive tide of inflation that has the potential to flood our everyday lives. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Understand how world currencies can be bought and sold with an accredited Forex course. As the dollar loses its value, it is essential investors look to foreign currencies to offset potential losses. Get a totally unique version of this article from our article submission service |