With the recent brouhaha over America's debt ceiling and general fear of economic collapse, it seems like understanding money should be a high priority. I've spent a considerable amount of time considering money. What it is, how its value is determined and the power it holds over you. When you really understand money then you'll have a new perspective on recent events and economics in general. Indeed, you'll see money in a whole new way.
Is that useful? Let's find out!
Money and Perception
Look, the first thing to understand about money is that it's imaginary. It's an abstract concept. You know... it's made of mind-stuff. This is true on many levels. Assuming you have a bank account, you never see most of your money. It's just a numeric total somewhere. Definitely conceptual because you cannot see it or interact with it directly. Most of your money is just a total, stored in a database somewhere (and presumably backed up). Does that fill you with confidence?
Even when you withdraw some money from the bank, the bills and coins you hold are imaginary. Not in the sense that the physical items aren't real. That would be silly. But in the sense that the perceived value is quite arbitrary. Let's study the definition of perceived value for a moment:
Perceived Value: A customer's opinion of a product's value to him or her. It may have little or nothing to do with the product's market price, and depends on the product's ability to satisfy his or her needs or requirements.This definition of perceived value, if understood, makes clear the true value of money. Money is valuable because people value products... they value things. How much money a thing is worth is utterly dependent on how much money an individual is willing to spend on it.
Granted, this is a convenient simplification. If someone spends $100 building a product, the product is clearly worth at least $100 to the producer. Let's call this value the intrinsic value of the product. Although, if the producer can't find a consumer willing to spend at least $100 on the product then it's clearly not worth it! So, while the intrinsic value of a product is decided by the producer, the consumer ultimately decides the true value of a product... through perception.
If we, as consumers, decide the value of products based on our personal perception then it stands to reason that the value of money is completely arbitrary. And if the value of money is completely arbitrary then we can safely assume that monetary value is an imaginary thing. It exists only in the mind.
Clearly seeing that the value of a product is based on perception raises some interesting implications. Let that stew in your mind for a moment before continuing.
Inflation and Greed
The second thing you must understand about money is that there's always more of it. Our money system is based on fractional reserve banking. Through lending, banks create more money every day. As more money is created, consumers are willing to spend more money on products. This causes a general increase in prices as the perceived value of products trends upward.
Why does this happen? Think on it for a moment. The less money you have, the less willing you are to spend it on products. So, you buy cheaper products and pinch those pennies. Yet, when you're flush with money, you're much more willing to spend it. So, you buy more expensive products and let the good times roll! As money is created the general population has more money to spend. So perceived value rises and, with it, so do prices.
Let's explore this further with a quick example:
Mr. Jones decides he wants to open a new computer repair business. Using his good credit rating (and a sound business plan), he goes to his local bank and applies for a loan to finance his new venture. Thankfully his loan is quickly approved and the money is deposited into his business bank account. Where does this money come from? Why, from the bank's existing deposits of course. The money deposited into his account is actually money deposited by other bank customers!
Well, with his newly deposited funds, Mr. Jones hires five new workers. Each one is paid a competitive salary. When the workers are paid, they spend their money on mortgages, car payments, food, utilities and other products. Thankfully, Mr. Jones business is profitable enough that he can pay back his loan on schedule. All the while paying the workers from his initial loan monies.
Isn't that fascinating? Mr. Jones' business was started with loan money. Loan money is literally created from nothing. The workers that receive this money are receiving fabricated dollars. And they spend them to buy products. Money, conjured from nothing, is spent on products. This happens every day!
Each loan executed creates money from nothing. And, as money is created, more money is spent. Voilà! Perceived value rises because people have more money to spend. The engine of inflation is unmasked!
Why is it that people are willing to spend more money when they have more money? Greed. Think on it. Greed is the only reasonable explanation for this phenomena. Greedy producers will set their prices to the maximum amount tolerated by their target consumers. Greedy consumers will offer more money to buy popular products.
It's important to note that inflation has a dramatic effect on consumers. As the money supply grows (and prices rise), savings accounts are penalized. Does that make sense? When prices rise, the purchasing power of savings is reduced. This, quite naturally, creates incentives in consumers to spend their money now rather than waiting until later. The result is a general trend of people spending most of what they make. There are a great many implications of this effect... but I'll leave uncovering those as an exercise for the reader.
Clearly seeing the engine of inflation is critical to understanding money. Let that stew in your mind for awhile before continuing.
Inevitable Economic Collapse?
Left unchecked by awareness, these three factors (perception, inflation and greed) will inevitably cause economic collapse. How does this happen? Let's take a look:
Through perception, people decide prices for products. As banks create more money, people have more money to spend. This causes inflation as the perceived value of products trends upward. As we've discovered, greed drives price setting among both producers and consumers. This isn't a problem if price increases (and the resulting increased profits) are passed along to employees that actually do the work. Really, what does it matter if a product is more expensive so long as your income has increased to compensate for it? No harm no foul, right?
Well, it turns out that greed drives company owners to hoard profits. This has the fascinating effect of causing a rift between the company owners and the employees. Many company executives reap tremendous pay when compared to those that actually do the work. And, it's clear that corporate profits are not passed on to the workers.
It doesn't take too much imagination to see the long-term implications of this: inflation + wage stagnation + company greed = unsustainable economy
What are people to do as prices rise beyond their ability to pay? Will companies still be sustainable as their workers are rendered homeless? Well, of course they will, as these workers are happily replaced with less expensive overseas workers. This practice just delays the inevitable as the inflationary cycle continues on a global scale.
What do you think will happen as larger and larger segments of the population become insolvent? Social unrest is to be expected. If history is any teacher, violence will likely follow. The "haves" will demand to be protected from the "have-nots" while the "have-nots" will demand more from the "haves."
As the government continues to spend money it doesn't have and tries to spend its way out of trouble through quantitative easing, we're not going to see an end to this madness anytime soon.
It stands to reason that hoards of insolvent government dependents will cause massive problems in the not-too-distant future. We can't simply spend our way out of this situation, can we?
Some Solutions?
There are several possible solutions to this problem. They all rely on arresting inflation (and reversing it) as soon as possible:
1. The majority of the population becomes aware of the destructive power of greed, inflation and perception and alters the way they view the economy and each other. Through reasonable agreement, prices are determined without greed. People work together happily. And there are rainbows and unicorns in the streets. I know, that's a pipe-dream, but it would solve the problem.
2. Change to a fixed money supply. Inflation is impossible if the money supply is fixed. Greed would still cause hoarding of money. But, interestingly enough, money that's not in circulation cannot impact prices. Hoard all you want, it makes no difference. In fact, the more money that's hoarded, the lower prices would fall due to deflationary pressure. This would quite rapidly solve the problem, but it's very unlikely to occur because government would lose its ability to spend through money creation. Asking government to do that is like asking a crack addict to put down the pipe. Fat chance!
3. Reset the currency. Government declares that dollars are worthless and must be exchanged for a new form of money. Some absurd exchange rate of old dollars to new is enforced. Using old dollars would be outlawed. This would cause quite a bit of disruption and unrest but it has precedent in history.
4. Massive population reduction. This is a chilling idea that hopefully never materializes. Yet, what is needed is a dramatic reduction in the money supply and a reduction in the expenses faced by society. This would rapidly, but temporarily, solve the economic problems. It's like hitting the reset button. Awful, but it would work.
My personal preference is solution #1. Yet, the pragmatist in me believes that the actual solution will be a mixture of #3 and #4. The dollar will be devalued through rampant inflation. The government will be forced to change currencies. Likely a global currency. There will be some kind of absurdly unfair exchange rate between old and new currency. This will cause outrage, unrest and violence. Killings will occur. I give this a high percentage chance of occurring. The question is, when will this occur? Hard to say. We'll see!
Summary
If we were to clearly see that the true value of money is decided by us then we'd have so much more power over our monetary destiny. Inflation could be easily controlled if we willed it to be so. Equalization between the "haves" and the "have-nots" could be realized if we wanted it. Or, at the minimum, society could easily decide that we should take care of each other's basic needs: food, shelter, health care and information access. It's well within our means as a people.
Yet, so long as greed drives our decisions this simple solution will elude us. We will continue to fall prey to the ideas of having more and more than we need. Running on the treadmill working toward an ever-expanding money supply will not solve the problem. More money is not needed. It's more compassion that's called for. More understanding. More awareness.
It's only when we clearly understand money and make decisions from that understanding that positive changes will happen. We must clearly see the illusion of money and refuse to allow it to control our thinking. Use money as a tool, not a master. That's the sane way forward. This is obvious... but are you willing?
