The world’s problem – money or …?

Before looking at the current utility of money, we’d better look at what it is supposed to be. To quote one college text on economics (probably long out of fashion, but I suspect all the college texts will be replaced very soon) “Money is basically a means by which goods and services are exchanged for other goods and services”. It’s raison d’etre is the simple fact that it is a more convenient means than bartering.

So that raises the question; what is the value of money? Since money is not considered a physical thing, but as a means, it has no fixed value in itself. It may say One Dollar on the paper, but the actual value lies in what it can be exchanged for. The value is said to be proportional to its scarcity, which is why the continual expansion of the money supply has always whittled away at the amount of actual goods and services it can be exchanged for. Doing a little comparison of exchange rates between Britain in – say – 1950 and Canada today, the dollar was worth two pints of top quality ice cream when I was a kid and possibly for half of a meager scoop on a cone today.

The essential problem with money is the fact that people wish to consider it as an absolute fixed measure of value, while the actuality is that over the long term it usually loses value almost as fast as a car once it’s been driven off the lot. To become the solid benchmark that a thriving culture needs it requires stability, and doesn’t have any.

Working people’s pension savings accounts, likely held in mutual funds, have lost half of their dollar denomination in the past six months. Half, that is, if they are lucky and didn’t think they were onto a good thing by letting Bernie Madoff or someone similar look after it. I don’t think they would be reassured in the least if they were told not to worry – that the dollars they lost were not as valuable as the ones they put in. But in actual fact the dollars they lost were only phantom numbers – scratches on a balance sheet – because they were never exchanged for goods or services, and therefore never had a real value.

The toxic securities, the hedged derivatives, the credit default swaps, and all the other fancy instruments on the banks’ balance sheets that they dare not carry at current price are surely an example that proves this. They have no denominational value, being too dangerous to place on the banks’ balance sheets because they would prove all the holders bankrupt. The US government is playing along and pretending that one day they might be worth the same number of balance sheet dollars as the banks initial ledger entry – maybe when today’s dollar is worth 25 cents.

If the apparent legitimacy of this sleight of hand confuses you, welcome to the club. The fellow who devised the original software to evaluate and check on the prices a financial concern should pay for the newly created menagerie of debt and hedging instruments (I’ve lost his name – he is Chinese and back in China, working in a state bank) averred that almost all the high priced financiers who used it to buy the toxic derivatives never understood the mathematics behind it.

More to the point they never grasped the initial assumptions that limited the range of events the system was reliable between. So they all got their million dollar bonuses for doing nothing but run a program they didn’t understand. You could also say that since the debt instruments they were alleged to be safeguarding were never safeguarded, they never performed a service and therefore never had any value.

If you are thinking that the purpose for which the concept of money was initially devised has long been lost in the dust, you’re not alone. Money is no longer what they pretend it is – so what actually is it? To say that is Maya – an illusion – may not be far from the truth, but I’ve run out of space and time and will continue next time.

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One Response to “The world’s problem – money or …?”

  1. I Lost T h i r t y P o u n d s in Only a Month Says:

    Hi, interesting post. I have been wondering about this issue,so thanks for posting. I will likely be coming back to your blog. Keep up the good posts

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