Interesting piece talking about the brazil currency event and telling a few other cool stories:http://planetpov.com/2011...r-question-what-is-money/
There was an island in the South Pacific called Yap. They had an impractical method of currencyâ€”gigantic stone disks, some taller than a person. They only used them for big purchases, like for a dowry or to ransom a warrior captured in battle. Iâ€˜m sure you can see where this is going: Pretty soon, the actual giant stone circles did not need to be physically transferred between parties; it became understood who the owner was. That was an innovation! The stone that was quarried for these giant circles was on another island, and one time, during a storm, the raft used to carry the stone was overturned. The crew survived but the stone was at the bottom of the Pacific. When they arrived on Yap, it turned out to be no problem. The islanders said, Look, we believe you. There is a giant stone at the bottom of the ocean and it still belongs to So-and-so. That is not so different from what we do today.
Again the key point is that the whole monetary system is based on how CONFIDENT people are in the "system".. It's all a mental game:
The value of our money is based on that trustâ€”not gold, or tulips. The magic of Central Banking is it works SOLELY on trust. It is an agreed-upon fiction. Once that trust is gone, our money becomes just another stone on the bottom of the ocean. I think thatâ€™s both very cool and very strange.
As I understand the point of the brazil story, and i could very well be wrong here since this is all so alien to me, is that the brazillian currency got into a cycle of collapsing in value (inflation) because people no longer trusted it to be stable.. The fix was therefore a completely made up fictional replacement currency that made it APPEAR that prices were stable. By tricking themselves into believing the currency had stabilized, they achieved the goal of stabilizing the currency. Money is a mental feedback loop -- if the masses think it's stable and trustworthy, it is -- if they lose faith in it, it enters a self-fulfilling feedback loop where it gets worse and worse until it's worthless.
And again this seems like the story of our entire financial system and why the financial overlords of our countries are always talking about "restoring confidence" to the market. We are supposed to believe the stock prices are based on the inherent "value" of companies and the goods/services they produce.. but more and more it seems like it has nothing to do with some ACTUAL value, but rather all a series of fictional feedback loops based on "perceived" value.
It all seems insane to me. But I'm probably misunderstanding some essential economic concepts.