In an Economic Depression what happens to the value of the Federal Reserve Notes?

Question

The Dollar Bill is not real money, it is Fiat Money.

So my quetion is, if you have, for example 10,000 US Dollars in an American Bank, and the Federal Reserve calls in a contraction of the money supply, what happens to your saving account? Does the $10,000 Dollars become worthless?

Or rather Does the buying power of your Dollar become so diluted that one bag of groceries costs $80 and a gallon of gas costs $30 Dollars a gallon?

Answer 1

In an Economic Depression, there tends to be deflation which increases the value of the local currency. With people earning less, there is less money in the economy and less demand. So suppliers have to lower their prices.

In deflationary times, cash becomes one of the best 'investments' as all other assets are going down in value. So $10,000 in the bank actually becomes more valuable.

Now that is classic depression economics caused by lack of investment and confidence. Today we are having an economic decline due to a 'supply shock' charecterized by shortages and inflationary pressures, and your $10K in the bank, in inflationary times, will decline in value.

The fed is in a tough position:

1) Loosen the money supply to maintain low unemployment but risk inflation

2) Tighten to keep a reign on inflation but almost certain create unemployment.

The correct answer is to loosen the money supply but direct those dollars toward activities that help the economy reach a new equilibrium. In this case would be toward activities that lessen the demand for oil, or increase the supply.

However, how dollars are spent is fiscal policy, not monetary policy, so that would be a function of congress.

Answer 2

As you say The Dollar Bill is not real money, it is Fiat Money.

So my question is, if you have, for example 10,000 US Dollars in an American Bank, and the Federal Reserve calls in a contraction of the money supply, what happens to your saving account? Does the $10,000 dollars become worthless? YES

AND the buying power of your Dollar become diluted so one bag of groceries cost you much more and a gallon of gas costs 10 dollars a gallon.

Buy some gold or GLD while it is still cheep, friend.

Answer 3

ya