Updated: Jun 21, 2022
Not many people have broad experience with economics, as economies are generally run behind the scenes. It’s difficult to understand the rationality behind systems of economics as complex as the USD or Crypto without years of education, as well as a historical notion of the value of the Dollar.
In fact, it would be fair to say that if people understood the economy too well, it wouldn’t run as efficiently, because what we see as irrational economics are actually, in many cases, what allows the economy to run in the first place. Investing wouldn’t be quite so enticing if people could foresee the future, and it’s only thanks to the complexity of the market that makes the future so opaque.
Part 1 – An Introduction to Monetary Concepts
As Earth 2 comes closer to releasing its token for trade on the marketplace, we are on the precipice of a great many people learning what it means to interact with monetary policy, including our CEO, Shane.
The value of money is simple for the average person. What costs $1.00 today will likely cost $1.00 next week as well. Outside of periods of inflation brought about through increasing the amount of money in circulating supply, inflation is generally low with most currencies in stable economies. For those of us unfamiliar, inflation is the process which causes the value of something to decrease because there is more of it relative to Demand, and so in a trade, you will be expected to offer more of that good or currency (increasing prices) for a product than you would have before supply and demand changes caused that good/ currency to be considered worth less.
Similarly, deflation is the mirror image of inflation, characterized by increasing value of currency (reducing prices), and less money supply relative to demand, thus causing it to have a higher value relative to other goods and services in general, when the process occurs in a vacuum. Deflation is an undesirable scenario since it subdues economic activity as people try to hold onto the money they have. Therefore, sometimes there is also the need for increasing money supply in order to allow people to spend freely again. These processes include “Helicopter Money,” a process which distributes money directly to individuals, and “Quantitative Easing,” which is a complex monetary process involving governments and banks. They are most often the result of a currency or good being seen as too scarce or valuable to be able to be spent or used, but can also be the result of monetary forces which caused that money or those goods to be busy doing other things, such as propping up certain portions of an economy.
Regardless, many Governments’ central banks have often had to rely on processes such as quantitative easing to cause liquidity to return to the market, and while it almost always has the effect of causing inflation later on down the line, in the short term, it causes money to circulate again, which is often considered a good thing.
The sequences of events here are actually more complicated, as Quantitative easing has an entire process which involves purchasing Government bonds and assets so that the money can then be distributed to banks for loans, however, what’s important here is the concept: Increasing supply of money so that the economy can continue circulating. So, how does this relate to E2?
Find out more in the next article coming on the 22nd June.
To be continued....
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