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<p>[QUOTE=&quot;Hrefn, post: 7856223, member: 115171&quot;]When nations adhered to a gold standard,&nbsp; the agreement to swap a nation’s paper currency for gold from the government’s reserves served as a brake on the issuance of that currency.&nbsp; Once the gold price is allowed to float, that brake is gone.</p><p><br /></p><p>The next mechanism to prevent profligate government spending was an functional bond market.&nbsp;&nbsp; Purchasers of government bonds are essentially loaning dollars to the government, with the assumption implicit that when the bond is redeemed, the dollars returned to the purchaser retain the purchasing power they had at the beginning of the loan.&nbsp; If the dollar is forecast to lose purchasing power, the interest rate demanded will be higher, of necessity, to cover the loss.&nbsp; &nbsp;&nbsp; </p><p><br /></p><p>Once the government becomes the major purchaser of its own bonds, it controls the interest rate.&nbsp; The right hand of the government (Treasury) can issue bonds ad lib, while the left hand (the Federal Reserve) manufactures dollars to buy them, also ad lib.&nbsp;&nbsp; And the price of the bond can be set to peg the interest rate wherever one desires.&nbsp; </p><p><br /></p><p>Since the dollar is pegged to nothing, to say it is backed by the full faith and credit of the government is really a verbal sleight of hand.&nbsp; Nothing about that promise precludes the purchasing power of the dollar falling.&nbsp; One of the commonly accepted functions of money is to serve as a store of value.&nbsp; On this score the dollar is unsuccessful. The meager consolation is that most other fiat currencies, e.g., the Turkish lira, are even worse stores of value.[/QUOTE]</p><p><br /></p>

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