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?

Friday 16 November 2012

Is money wealth?

What is "money"?

What is "wealth"?

What do you think of the idea that "real wealth" is the embodiment of durable goods already produced?

Consumables are... consumed... so they are really "present production".

Debt is a representation of production that is promised in the future.

"Money" (credit, the counterpart to debt) is the presently-intangible representation of current and future production. As long as that promised production materialises, the money will turn out to have been good.

If you happen to agree so far, then by saving "money" you are hoarding an intangible claim on either:
On the other hand, if you hoard "real wealth", you are simply raising the value of past durable production. Your claims are therefore only against other past hoarders, who give up their durable good to you in exchange for your earned "money", for some reason that happens to suit both their purposes and yours at the time.

No slaves.

The huddled masses can consume what they need.

You are not impeding the liquidity of trade by extracting the very lifeblood of the system: money. The purpose of money is simply to lubricate trade. Money is not meant to be hoarded. Durable wealth is.

Don't be a jerk! Only hoard assets that may prove of interest to other hoarders in future, when you might find yourself in need of "money" for some as-yet-unknown reason.

Of course, some assets are likely to continue enjoying more 'moneyness' than others, and some durable assets might be better used in the production of higher order consumer goods. Use your own imagination about what assets are best to choose.

Friday 17 February 2012

The Balance Sheet

Since this is a little talk on somewhere called "Fictionland", let's start by stating that their currency is called Fictions, and the currency symbol is : ₣

So without further ado here is the most recent Fictionland balance sheet:

The first thing that we can observe is that the bottom line figure on both sides of this balance sheet, in the two black boxes, match each other. That is what is supposed to happen when you prepare a balance sheet — the two sides are meant to balance!

Looking above the bottom line on the left hand side we can see all the assets that belong to this institution1. On the right side are any liabilities of this institution — all promises that it has made to anyone else.

In the liabilities column, the green section contains the equity in the system that is at the disposal of the institutions shareholders, today.

Breaking down the assets column, we can observe that this institution has chosen to make a distinction between two categories of assets that it owns — those in the light blue area, which are claims on entities within the domestic economic area, and those in the orange area, which are not claims on any domestic entities.

The assets are things that this institution can count as its own, but most of which rely on some other institution to keep their promises going forward.2

If any of the assets fall in value, there will be no solvency issue to the system — so long as the losses do not exceed the shareholder equity.

That is, basically, all there is to a balance sheet. Pretty easy huh? Now go and make your own balance sheet of your household's assets and liabilities. No, really — please, I recommend that you do! You may find out a lot about the state of your finances, which you hadn't realised before. Good or bad… it's always better to know the facts, right? ;-)

Be responsible, respectable,
stable, but gullible.

"But, DP," I can hear some of you asking now, "what happens to Fictionland's balance sheet, if one of the institutions that has promised to repay their loans due to it, defaults on the loan and the payments don't come after all?". That's a great question — thank you for stopping by and reading my humble blog today! I presume you mean, for example, Fictionland has loaned money to, say, Greece? Hmmm... to save confusing anyone that isn't interested by that question, let's take that part of the discussion to the comments section, below, shall we? ;)


DP :-)

1 All of these observations about balance sheets apply whether the balance sheet was drawn up for a company, a charity, a country, a political party, a household, an individual person - or indeed any other kind of institution you might think of.

2 It is not strictly necessary for Fictionland's balance sheets to employ this very clear colour-coding system to highlight the distinction between these two types of assets — in fact it is quite unusual for an institution to do something as visible as this. But it is very helpful of the Fictionland management team, isn't it?