Thursday, December 11, 2008

From elastic to plastic money

Consider the view put forward by Paul Ashworth, US economist for Capital Economics, as reported by the Telegraph, "You know the US Treasury will give you your money back, but your bank might not be there."

I suspect the coming months will give quite a few investors who believe as Mr. Ashworth believes, a good chance to learn about the loss of meaning of "elastic currency."

As described in the Legislation the Federal Reserve Act is: An Act To provide for the establishment of Federal reserve banks, to furbish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

In Physics, elasticity refers to reversible deformity under stress. Like a rubber band, which, when pulled, deforms, but returns to its old shape, an elastic currency is one which is supposed to deform in value but return to its old value when the stress is removed.

Sticking with Physics terms, I'd call our money, plastic, not elastic. A plastic substance holds its deformation after the stress is removed. Perhaps the specie standard was the quality that gave money its elasticity and its removal leaves us with the current plastic money.

I agree with Mr. Ashworth, but I suspect, given the shift from elastic to plastic money, (pun on credit cards intended) that the value of that money will not spring back but will instead sink, like a piece of plastic placed over heat.

Gold too, deforms when heated, but its value is unchanged by the deformation. At times of market stress, when plastic currency loses its value, Gold's tends to rise.


Keenan said...

"Plastic" is also an appropriate adjective as it connotes lowliness in value or esteem. Unlike "The Graduate" Benjamin Braddock, today's graduate professor Ben has embraced and promoted ths manner of plastics.