What is Dear Money?
Have you ever wanted to buy something, but it was too expensive for you? Maybe you wanted a new bike, but it cost $500, and you only had $100. You could ask your parents or friends to lend you some money, but they might charge you a high-interest rate, like 20% or 30%. That means you would have to pay back more than you borrowed, and it would take you a long time to save up enough money. This is an example of dear money.
Dear money is money that is hard to get, because it has a high-interest rate. Interest is the extra money you pay when you borrow money, or the extra money you earn when you lend money. When interest rates are high, money becomes dear, or expensive. When interest rates are low, money becomes cheap, or affordable.
The interest rate is the price of money. It changes depending on how much money is available in the economy, and how much people want to borrow or lend. The more money there is, the lower the interest rate. The less money there is, the higher the interest rate.
Sometimes, the government or the central bank can change the interest rate on purpose, to control the economy. They can make money dear or cheap, depending on what they want to achieve. This is called monetary policy.
Why Does Dear Money Exist?
The government or the central bank can use dear money to slow down the economy, when it is growing too fast. This can happen when there is too much money in the economy, and people spend it on goods and services. This can cause prices to go up, which is called inflation. Inflation is bad, because it makes things more expensive, and reduces the value of money.
When the government or the central bank makes money dear, they reduce the amount of money in the economy, and make it harder for people to borrow or lend. This makes people spend less, and save more. This can lower the demand for goods and services, and lower the prices. This can reduce inflation, and stabilize the economy.
For example, in the 1980s, the U.S. economy was experiencing high inflation, because of the oil crisis and the expansionary fiscal policy of the government. The Federal Reserve, which is the central bank of the U.S., decided to make money dear, by raising the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The federal funds rate went up from 11.2% in 1979 to 19.1% in 1981. This made borrowing and lending very expensive, and reduced the money supply. This also reduced the spending and the inflation in the economy.
How Does Dear Money Affect Accounting?
Dear money affects accounting, because it changes the value and the cost of money. This can have an impact on the financial statements of businesses and individuals, such as the income statement, the balance sheet, and the cash flow statement.
For example, if a business borrows money at a high-interest rate, it will have to pay more interest expense, which will reduce its net income. This will also reduce its cash flow from operations, which is the amount of money it generates from its core business activities. This will make it harder for the business to pay its debts, invest in new projects, or distribute dividends to its shareholders.
On the other hand, if a business lends money at a high-interest rate, it will earn more interest income, which will increase its net income. This will also increase its cash flow from investing, which is the amount of money it spends or receives from its non-core business activities, such as buying or selling assets, securities, or loans. This will make it easier for the business to grow its assets, diversify its portfolio, or reinvest in its business.
Summary of Dear Money
Here is a list of bullet points that summarize the main points of the term dear money:
- Dear money is money that is hard to get, because it has a high-interest rate
- Dear money is used by the government or the central bank to slow down the economy, when it is growing too fast and causing inflation
- Dear money reduces the amount of money in the economy, and makes it harder for people to borrow or lend
- Dear money affects accounting, because it changes the value and the cost of money, and impacts the financial statements of businesses and individuals
