[Wildbill]

Excellent post. Hard concept to explain really. Money is only as good as the central bank. That is why the best and most reliable currencies all have an independent CB that isn't subject to constant political pressure. Lots of lesser countries prime the pump whenever an election comes up. Mexico is a great example of what a CB that gets serious can do. For the 1900s everyone in the country feared for the Presidential election every 6 years. It wasn't like the people were able to vote for a candidate other than the one chosen for them anyways, but to rig the contest more the government would print out lots of money and give lots of favors in the 6 months before the election. Then the new President hit office and first thing he would do is devalue the currency and the economy would suffer. It was so deeply ingrained that even though the last election had an independent CB and had a very tough fiscal policy, the people still feared after the election their money would be devalued. In the weeks before the inauguration people were buying dollars every chance they could. Fox got elected and the markets acted with joy, the peso was strong, then in the month before he took office the peso saw heavy depreciation. Surprise, nothing happened, just as anyone with common sense could have told the people, but people in countries such as Mexico don't trust or pay attention to what bankers say. Now they have a lot more faith and the CB acts independently and manages the currency value effectively. That is why bankers always talk about credibility, that is what the game is all about. If you gain credibility over 5-10 years it provides untold benefits to a country from lower interest rates to far higher credit availability and that is what makes a lower or middle income country move up in the world, a fully functioning credit market. Unfortunately most of the world still operates on a vote-buying, if not vote rigging system and why populists are always getting elected, and most of all why countries need to establish and build a solid democratic society with independent institutions run by capable people, not just faithful cronies of the boss.