Monday, 19 November 2012

What is "currency"?

Currency is "money".

So much for really simple answers, eh? Now you're just wondering (if you are really searching for truth) "what is money then?" :-)

Looking at it a little more deeply now, which is always required if you want to actually understand for yourself how money really works in the real world, we see that when you hold a dollar/pound/euro/yen/etc in your hand or in your bank account, what you really hold is a credit in that monetary system.

The existence of a credit automatically and necessarily implies there must be a corresponding debt somewhere in the system that balances it. You can't be owed something (a credit), if nobody at the same time owes it to you (a debt). So it is clear that the currency ("money") system is a way to record who owes how much 'stuff', and who is owed how much 'stuff'. From this simple observation we can therefore convincingly establish that currency, "money", is always and everywhere CREDIT.

Yes, contrary to what many people would have you believe, "money" (currency) is not gold. Or silver. Or any other tangible thing. Money is what you hold when you are waiting to be paid in full, with some real wealth of one description or another, in return for your past efforts or your giving up possession of some real object of wealth. The monetary system only exists in order to lubricate the trade of real wealth. It is merely an accounting mechanism. Everybody with "money" today cannot really have all the things their money enables them to believe they could; that is simply a collectively-held delusion.

The wonderful thing about the modern currency (money) system is that you and your counterparty are not directly connected. The creditors across the system are in aggregate "connected" to the aggregate of debtors across the system. As much is owed by the whole set of debtors across the system, as is due to the whole set of creditors. It is a great way to lubricate and encourage trade - match-making the productive and consumptive parties, without them ever having to meet or know anything about each other. Or be anywhere near each other. At least, that is how things work out in the ideal world of an always-growing economy, where debtors are able to keep up the payments on their loans. Which is why governments need always be deeply concerned about ensuring positive "economic growth".

The monetary system, the balance of credits and debts across society, will fail without positive economic growth. Are you expecting permanent economic growth, without price inflation, for the foreseeable future? Or are you expecting austerity, lost jobs, wage cuts, shrinking disposable incomes due to rising prices, people running out of nicknacks to sell to CashConverters and jewelry to Cash4Gold? People becoming increasingly unable to keep up the payments on their loans and eventually having to give up and default on them?

Fortunately, even if you are expecting bad news about economic growth in the coming months and years ahead, all of your credits in the system will be honoured. The government will ensure you receive all of your due credits, because they will create money to make sure it happens even if the debtors in the system are unable to perform their part in the bargain by providing the promised goods and services they were going to repay the loan with. However, what you will receive, in real terms of goods and services you can buy, will be diminished. The losses will be socialised — spread out across all "savers" in the system, in proportion to how much "in credit" they are at the time.

Sounds good, right? The rich will pay! Har har har ... you think "the 1%" just keep a bunch of money credits and that's how they get to be rich? Think on my friend! No, only the people between "the rich" and "the poor" think having money in the bank is how to be rich. There is a reason they are often called "the squeezed middle".

The greatest irony whenever a serious economic downturn begins to materialise, is that many people rush into the "safety" of keeping credits in the monetary system. Today we see this in the rush into the perceived safety of US Treasury bonds, or UK Gilts (in addition to less-sophisticated people just trying to save some cash to help ensure they can cover their bills for a while if something bad happens to them). It's like walking out onto the incredible expanse of sand at the beach when the water is sucked out abnormally far, just as a tsunami is about to hit land. Consuming anyone who has not made it to a safe, high place.

Where do you stand?

If you are reading this, I guess: probably in the middle. Right?

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