Friday, December 02, 2005

Money Is Nothing But Trust

I've been trying to figure out what factors affect the forex exchange rate. After a lot of thinking, I've come to the conclusion that money is not worth the paper its printed on. What gives money its value is the trust it represents. And it actually makes a lot of sense.

For example, investors will line up at the door of a reputable investment banker when he says he needs $2 million to buyout a bankrupt company which he can turn around in 2 years (after which he can sell it for $2.2 million). On the other hand, everyone will ignore an ordinary man when he claims the same. The difference between the two is the investor believes (or trust) that the "reputable" investment can/will deliver on his promise.

This investment banker of course gets a percentage of the profit. The premium he charges is proportional to the trust he has in the eye of the investor. The higher the trust, the higher premium he can command.

Same thing can be said about IPO/Stock Market. Higher the investor's expectation (or trust the company will do well), higher the stock price and vise versa.

Other examples out of the financial market, higher the buyer's trust in the quality of a car/designer cloth, higher the product's cost. Higher the employer's trust in the quality and/or productivity of an employee, higher the employee's salary/bonus/raise.

This is probably why money are printed with the "Trust".

1 comment:

pipsqueak said...

All I learnt at econs was that you should always spend money now, coz otherwise, it will be worth less in the future, so what if things get cheaper over time. your money is worth less anyway.