OFF TOPIC: What is Money?
I was viewing some interesting YouTube videos concerning the current world economic emergency. Mexico has declared it is in a recession, using the metrics the current USA administration is declaring are now incorrect. The government says if the economy stays in this recession, then the economy will eventually be officially in a recession, but it is not in a recession yet. Yeah. Right.
The issue outside of the USA is the ledgers the various banks use to track trade of goods for Currency is completely out of balance. These ledgers are kept by the trading banks and balances move back and forth. Often years can go by with no one exchanging physical dollars, just entries in a balance ledger.
Some of the banks are demanding payment in dollars, as the country they are out of balance with can never export enough to them to bring the ledger back to a reasonable balance. This is the 65 to 90 trillion “missing” everyone was talking about. There is also an international shortage of dollars to settle the debts, so global trade is slowing.
During the EuroDollar University Creator’s (Jeffrey Snider) interview by a third party, his statement that “no one knows what Money is” was interesting. I can understand his problem. No economist ever deals with Money. They deal with Currency. Currency is not Money. Currency can be worth nothing tomorrow, but Money is the underlying unit that Currency represents. Currency is what people accept as being Money, for practical purposes.
However, since no one knows what Money is, I will attempt to explain it:
- Money always has value.
- Money is not an object.
- Money can embed value into an object.
Ok, so what is Money? Money is the intelligent application of energy to an object to transform that object into something that has value. The value stored in that object is directly related to the Money required to recreate it. The process required to utilize Money is this formula:
Money = Intelligence * energy * time to completion of object transformation
In English, Money is intelligently using energy over a period of time to transform an object into something with a stored value. The intelligence required for Money creation has little or no relationship to the intelligence of the individual.
Money cannot be saved. However, it can be used to create a value store as an object, such as a computer, or a gold coin, or a hole, or a cupcake, or Fiat Currency. But there is a problem with stored value as shown in the following formula:
value stored = money cost of object * desirability / (time * desirability change per unit of time)
In English, the value stored into an object is the Money used to create it. The ongoing store of value typically diminishes over time. A brand new car might be worth $100,000. In 30 years, it may only be worth $10,000. The desirability decreased 90% over 30 years, or 3% per year (on average).
Cupcakes store value over a brief period of time. Fresh out of the oven their stored value is highest, perhaps infinite (divide by 0). Wait 4 hours, and the desirability is less. Give them a week, and they have much less value. Give them a year and their value goes to almost zero. Interestingly, if you give them 100 years, their value may go up, so value store formulas can change based on time between creation and acquisition of an object.
Different required intelligence levels directing energies create different value store objects. Therefore different people using energy, intelligently applied to transform an object, will create objects with different value stores.
This is often related to the time required for completion of the value store. Time to completion will often include the time to train the director of the energy. So, there is not a 1 to 1 ratio between a hole digger’s time and an engineer’s time. This is true even though the hole digger might have an IQ of 150, and the engineer might have an IQ of 110.
In today’s world, digging a hole with a shovel requires less training than creating a drawing of an engine crankshaft capable of handling 500 BHP. Therefore, the value stored into the transformation of a flat spot into a hole is less than the value stored into transforming a sheet of paper into a crankshaft drawing, and ultimately, the crankshaft itself. However, transforming of metal into a crankshaft can have less value store than you might expect, by the use of directed energy using automated (semi-intelligent) processes.
Money was required to create the shovel the digger used. A shovel is more valuable than fingers for digging a hole. It increases the intelligence of the dig as opposed to using fingers. Even so, there are alternatives to shovels.
A hole digging machine has more stored value than a shovel. So using the hole digging machine requires a much higher up front acquisition cost requirement for the hole digger. But that is not the end of the story.
The digging machine oxidizes fuel to create the energy necessary to dig a hole. This applies more energy per unit time than using a single person standard shovel. The machine dug hole can be finished much faster than a human using a shovel. Therefore, the digger’s personal time used will usually be less when energy based equipment is used. In this case the time to store value drops significantly. That drops the total Money required to do the dig, because most of the energy comes from an external source. This energy causes the time factor to be so low it causes the absolute value store of a hole to drop.
Different Value Stores Work Differently
So, what we think of as Money, is the result of using Money to create a value store. Currency is a value store, until it is not. Some value stores are more or less permanent. Some value stores are ephemeral.
All value stores are subject to the desirability decrease factor over time. In the above formula, the change may be a factor less than one, which causes the value store to go up over time. This change is affected by rising energy cost, rising skill cost, etc.
In simple terms, using external energy can cause the value store to increase as external energy becomes scarce. Diesel price increases increases the cost of food, as diesel is burned to transport food to the location you purchase the food from.
Currency is the currently accepted symbol representing money to the uninformed. Using Currency, I can have a person use their Money (Energy & Time & Skill) to put value into an object. That object often has an expiration date for the value contained by it. A design for a 3″ x 5″ circuit board with one J-K Flip Flop implemented using transistors had value in 1965. Today, not so much.
Currency is not Money. For example, the United States of America replaced most of its 1930’s and before Currency with new Currency. One year the 1930’s Currency would allow you to purchase items, the next year it would not. However, we have been brought up since childhood to view Currency as Money, and we happily trade it for Money, and we trade Money for it. Until we don’t. (Try purchasing food with Confederate Currency.)
So, Currency is, in other words, what is currently accepted as a Money representation. That is why Fiat Currency exists. That is also why international trade works using ledgers without exchanging Currency for long periods of time. The entries themselves represent Currency which represents Money, which is being exchanged on a one-for-one basis using ledgers.
The various governments declare Currency to be a symbol for Money. This serves their purposes, and allows them to keep the populace fed and relatively happy. Everyone accepts currency symbols. This happens even though the Money required to recreate that symbol onto paper is minuscule. Well, until people stop accepting that Fiat Currency, at which point it loses stored value and becomes paper with no stored value. Much like a stock certificate becomes worthless when the company it represents stops operating.
So, is Gold and Silver Money?
Technically, no. Gold and Silver are stored value items. Even so, it requires a lot of Money to turn gold into a coin, so the stored value is high. It cannot easily be duplicated, so it has a stored value desirability factor (due to rarity) that often increases with time. It does not decay under today’s environmental conditions, so its stored value remains constant.
The Currency’s symbolic representation of Money fluctuates, so gold appears to change in price. However, what is happening is the Currency’s symbolically stored value is constantly changing.
We see the “price” of gold change because we always read about how many dollars it takes to purchase gold, rather than how many dollars gold can purchase. Gold’s stored value does not really change, (except for the fact that more energy is required to extract is due to it becoming scarce) so we are seeing the Fiat Currency becoming less and less of a representation of Money.
Finally, the stored value of anything (even gold) can actually go to zero. This happens during a famine. If you are starving, a gold coin does you no good unless it can be used to acquire food. If everyone is starving, they can’t eat gold, so gold becomes worthless to them. Its desirability approaches 0.
Money Vs. Stored Value
Did you notice anything during this discussion? Stored value is not Money. Money is not physical, but it is the process of transforming a physical object. As such, it can be quantified, and transacted using generally accepted Currency, at different rates that depend upon intelligences applied, energy used, and time used.
If energy used is high, Currency per time unit can be high. If intelligence used is high, Currency per time unit can be high. If intelligence and energy is low, but time used is high, the Currency per time unit can be low, but the total Currency Units will be high.
Think of a maid with continual employment. Her Money (Time & Energy & Intelligence) goes into transforming dirty surfaces into clean surfaces. Straightened pillows, clean sheets, etc. Each year, the total Currency Units required for this Money are usually higher than what is required to bring in a high priced Designer consultant for an eight hour day.
An engineer can acquire more Currency Units per hour than a hole digger with a shovel. However, a hole digger with a digging machine can often acquire the same number of Currency Units per hour as an engineer, but there are only so many holes to be dug. The owner of the hole may come out with less Currency Units outlay for the hole dug by the machine, but the worker has a higher income level per hour. So, both come out ahead in the short term.
Again: Money is not physical; it is the process of intelligently changing the physical world using energy, and, as a result, is subject to quantification.