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Money
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Prices. Theory of Benefit of Use.
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Money is the liquid form of human interaction and equates the exchange of work, energy, effort, creativity and time. Money is whatever can be used in an exchange of value, and which doesn't have direct use, like: sticks, stones, shells, gold, silver, paper, bits. For example, in an exchange of gold for a sheep, the gold is called money if it will be exchanged for something else (from someone else) instead of being directly put at use by its new owner. However, when both parties of an exchange have direct use of the subjects of their trade, like in an exchange of a goat for a sheep, that is called barter and does not involve money. Money is a measure of commodities such as goods and services, that is, their comparative values on the market. Money itself has no value, it is just liquidity which facilitates exchanges. Money has value only through what it stands for: the commodities it can buy. Money has a context in which it is money. For example, game money is money only within the game (or anywhere else it is accepted for a trade). But when used outside its context, game money ceases to be money and becomes worthless. This will happen even for gold, when it will become possible for humans to create gold from pure energy using something similar with particle accelerators, at costs comparable with the mining costs of gold. Money is substitute for value because its primary use is as "a medium of exchange of value used in a specific context"; gold money is also a substitute for value because it would be worthless in a world where it could be created from energy (at a lower cost than mining). Money is primarily a medium of exchange used on a market. If there is no exchange of goods, there is no need for money. This purpose of money can be successfully fulfilled by various types of money, like: gold and silver, paper money (either issued by governments or private banks or individuals), game money, various goods and assets (like food, clothes, animals), basically anything which has value for the opposite side of a trade. Money is also a medium used to store value a long time. This purpose of money can be successfully fulfilled by few types of money, like: gold and silver, usually non-productive assets.
Money can be an asset or trust (as in "I trust the grocery will accept the money which I accept from other people, and will value it at the same level as I do"). A trust is a contract or promise of delivery of asset money (or other products or services) of equal value with the bought products and services. Because the main purpose of money is to exchange value, money is not necessarily an asset. For example, even with no exchange of assets, the assets would still exist, but money would not. Self-sustained people have assets, but don't need / have money. Assets can be productive (including those with direct usage, but not directly productive), like cows and houses, or non-productive, like gold (of course, gold can also be a productive asset if it's used in industry to create added value to other products and for work). The productive assets are used to produce but not to store value, and non-productive assets are used to store value (because these assets degrade very slow) but not to produce it. The best form of money is a non-productive asset, like gold, because it preserves its relative market value for a very long time. Since exchanging cows for grocery is not exactly an easy thing to do, money is used. Since asset money is difficult to use, trust / promise can also be used as money. Money itself is not productive. What money is exchanged for (like work), may be productive (but money itself is not). If you exchange money for money you produce nothing.
Gold moneyHere are some reasons why gold is the best choice for money:
There are concerns that gold can't work as money in an economy open to international trade. But, if do a circular exchange (foreign gold -> foreign currency -> national currency -> national gold), it becomes visible that the final gold amount is almost the same as the initial one. This means that the price of products, expressed in weights of gold, are stable regardless of what the exchange rate of fiat money is. This means that using fiat money is useless for people. Only governments benefit from manipulating the fiat money.
Speculators If gold is used as money, speculators would necessarily interfere with the free society by trying to accumulate (huge amounts of) gold. This would happen because gold is decay-proof (and inflation-proof). For example, money facilitates the exchange of food. But food is eaten in a few days (meaning, its entire value disappears), while the gold is forever. So, the person who accepted gold still has it after a few days, but the person who bought the food is hungry again. One could say that the person who now has the gold is also hungry, but people who realize gold is better than food would try to keep the gold and pay with something else (another produce would be great, but that's not liquid). So, the person who keeps the gold is protected from the constant decay of (productive) assets. Some people would speculate this (on a large scale): they would store gold to protect themselves from this kind of natural decay, thus gaining value over the rest of people, without working like the rest. Basically, this is how paper money is born (again).
Paper moneyPaper money are notes which can be backed or non-backed, redeemable or non-redeemable. "Backed" means that a paper note has an associated amount of an asset, stored in safe place (usually a vault). "Redeemable" means that a paper note can be presented to the place where its backing asset is stored, and receive in exchange for it the amount of asset which is associated to it. "Paper" refers to the medium of exchange (which is paper), not to the underlying asset of the money (which is not the paper itself). When the paper money is non-backed and non-redeemable, there is no underlying asset of any kind. Paper money is a better medium of exchange of value than any asset-based money, because it can be used faster, it is very lite, and it can integrate various contract terms. However, because paper money is exposed to possible frauds from the side of the issuer, it is not a good medium of storage of value. Paper money has one other property: exchangeability. This property is intrinsic to any type of money because this is what actually makes something money: the ability to exchange it for assets. So, even if the paper money is not redeemable in an asset, it is still exchangeable to various assets. The problem with lack of redeemability is that the people who hold the paper notes can end up with no purchasing power if the issuer decides so (or people lose trust in the money).
Backing In today's world, the fiat money is paper money which is neither backed nor redeemable in gold or silver (or any other asset, for that matter). However, this fiat paper money is backed by something: people's trust in the economic context of the country which issues this money. This "backing" is not the same as the "backing" from gold backed paper money, but it has the same main attribute. First, let's see how backing works in gold backed paper money. Let's say we have an amount of paper notes, all identical, where each note is backed by one gram of gold. Now, let's double the amount of paper notes. What happens? Because of the backing with gold, and in order to preserve the backing, each paper note is worth only half gram of gold. So, the main attribute of backing is that the value of the medium of exchange equates the value of the backing asset. In the case of the fiat paper money, the same attribute manifests. Let's say we consider the economy of a specific country. The central bank of this country issues an amount of money which has to provide optimum exchange of assets, according to the speed of exchange. Now, let's double the amount of fiat paper notes. Just as in the case of gold backed paper notes, the value of each note is reduced to half. This happens because, in the economy, the prices adjust upward to contain more paper notes for the same assets. So, the value of the medium of exchange equates the value of the backing asset. This is why fiat paper money is backed by people's trust in the economic context of the issuing country. The main difference between gold / silver and fiat money is the speed with which people's trust in them changes, depending on the economic context, speed which is much higher for fiat money. Gold / silver present a very stable medium of exchange and storage. Of course, in the case of this type of money, the lack of redeemability makes it a bad choice to store value. This is also what confuses some people to say that this type of fiat paper money is not backed by anything. However, backing and redeemability are two different issues.
Digital moneyDigital money is a digital number which can be backed or non-backed, redeemable or non-redeemable. The medium of exchange is the digital world: computers, Internet. One form of digital money is GRIC.
Flow of moneyIs there enough gold in the world to use as money? This is an irrelevant issue. In a free society, the price of assets is automatically adjusted according to the amount of money in circulation (it is irrelevant how much gold there is in vaults). The economic balance of a society depends on several factors: amount of money in circulation, economic growth, growth of population, efficiency of work. Let's consider a free economy, a stable amount of money and population, and with no economic growth. People work and create products and services, and sell them. Then, they are paid for what they sell. This process happens the same way with all people in the entire economy. In time, assets and services are created and destroyed, but the amount of money can stay the same because money flows among producers, back and forth. Economic growth has to be understood as an increase of the difference between the creation and destruction of assets and services, in favor of creation. People can work and create without being limited to the amount of money in circulation. This means that the economic growth can exceed the growth of the amount of money in circulation. Now, let's consider there is economic growth. This means that the total price of all assets and services in circulation grows, and thus either the prices fall down (deflation of prices), or there is a shortage of money. This means that economic growth has a limit up to which it can be sustained.
Increasing the amount of money in circulation In any economy, some money is stored (in vaults), that is, it doesn't circulate among producers. If the prices deflate then the stored money starts to circulate (because it can be used to buy more things), thus inflating prices (because there is more money circulating). This would be a great way to balance the prices. However, people who save money long enough (for years) would actually be able to make a fortune without doing anything. This is not a problem if it occurs on a small scale, but on a large scale it creates imbalances. Still, the deflation of prices expressed in gold can only work up to a point. For example, the deflation can't go beyond the point where the basic human work needed to mine new gold exceeds the basic human work needed to grow potatoes. One other way to increase the amount of money in circulation is to mine gold and put it in circulation. This inflation of money can compensate the economic growth, thus keeping prices stable. Of course, when the population also grows, there is one more factor to consider to the economic stability.
Minting gold coinsWhat happens if, in a free market, various companies would mint coins? Obviously, this would cost money, but the value of each coin does not include the minting cost; each coin would only be as valuable as it's gold weight. Does this mean that each coin should have a face value which should be bigger than the spot value of the gold weight? Not necessarily. Actually, this would complicate things too much. If gold coins would be used on a mass scale, there would be no need for a face value other than their gold weight, just like it happens in GRIC systems. Once they are in the system, the minting cost is irrelevant. When a user funds his GRIC account, he pays a fee. Yet, then, he spends the gold at spot value. This means that the person who puts the gold into the system absorbs the fee. It's all about who (other then the mint) puts the gold into circulation. Basically, the first user has to absorb the minting costs from his profits; such users are probably banks because people would probably have no chance to go with 100 kg of potatoes + 10% minting costs to the mint to get a one ounce gold coin, but they might be able to send in gold bars or nuggets. Automatically, this means that their services (= loans, in the case of banks) include the minting costs. So, gold coins can be traded at spot, but the services of the first user must include the minting costs. So, it's not that a gold coin currency has to have a face value higher than its spot value, but the prices have to increase so that the operational costs of the currency could be covered from the profits, just like the storage and transaction fees of GRIC systems are covered from profits, not from face value differential.
Prices. Theory of Benefit of Use. Why does trade happen? Is there inequality or equality in a trade? Any product or service has a price of trade. The price of a transaction is not unilaterally set. It is the intersection between the minimum price requested and the maximum price offered. In a free society, one kilogram of potatoes can cost as much as a computer chip. The potatoes can be produced with one's bare hands, yet a computer chip integrates the entire human history and technology. Why are the prices equal? Because prices directly reflect the benefit of use, not the amount of work, creativity or effort to sell the product.
Benefit of use of products The buyer of a product wants to make a trade because he benefits from the use of the product. The sellers wants to make a trade because he benefits from the use of the products he can buy with the money he obtains from sales. There is only one thing which determines a trade in a free market: equal exchangeable benefit of use. Both sides benefit from a trade. It is irrelevant how much this "benefit" is valued (anywhere). The buyer benefits from the use of the traded product. The seller benefits from the money obtained from the seller. If the seller can't cover the work he invested in the product he sells then he stops selling. The benefit of use (BU) represents the usefulness of a product / service to one side of a trade. The befit of use means that an individual has a benefit from using what he has in his possession. The benefit of use is not limited to immediate usefulness, but includes stored usefulness, that is, the usefulness of a product at a later time. Actually, immediate usefulness is almost inexistent; even if you buy a bread, usually, you are not going to eat it immediately, but only after a number of hours. The benefit of use rarely reaches a critical level for a buyer (like when food is critical to a starving buyer). It usually remains at the level of stored usefulness, and thus the trade is subject to potential postponing. The maximum benefit of use of work occurs when work (= knowledge, experience, abilities, time, energy) is enough to just barely satisfy (personal) sustainability needs, like when an individual can use his own work to farm his land (without producing goods in excess). The minimum benefit of use of work occurs when work is in excess of sustainability needs, like when a farm produces goods in excess. A product has almost no benefit of use for its seller because he can't do anything with the product, but has benefit of use of the money obtained from a sale: the money is used to buy products which have benefit of use (for example, direct usage or creation of other products). A product has a benefit of use for its buyer because he needs to use the product for something; this is where the stored benefit of use of the product influences the decision.
Benefit of use of money Money has the highest (general) benefit of use because it can be traded for virtually any product. There are contextual differences between the benefit of use of paper money and of gold money, due to the different ways they store and exchange value. Money has benefit of use for a seller of a product because he needs to use other products, products which he can buy with money. Money has benefit of use for a buyer of a product because he can trade it for virtually any product, at any time.
Benefit of use of profit The profit of a trade has benefit of use for a seller of a product because this is how he accumulates money which he may need to use later. The profit expected from a trade is not critical, that is, it can decrease down to zero and trades would still happen, depending of much the seller benefits from the accumulation of money.
Benefit of trade The befit of trade means that an individual has a benefit from using what other individuals have, and thus wants to make a trade with them. The benefit of trade (for seller – BTS, for buyer – BTB) equates all factors involved in a trade, for one side of the trade: benefit of use of product (for seller – BUPS, for buyer – BUPB), cost of production (CP), price of trade (PT). The benefit of trade for the seller is "BTS = BUPS + PT – CP". The benefit of trade for the buyer is "BTB = BUPB – PT". The trade profit of the seller is "PS = PT – CP".
Balance of benefit The balance of benefit (BB) represents the difference between the benefit of trade of the seller (BTS) and the benefit of trade of the buyer (BTB): "BB = BTS – BTB". The balance of benefit equates "BUPS + PT – CP = BUPB – PT". A trade occurs when the balance of benefit is zero. Since at the end of the production process, the cost of production remains fixed, during the negotiations in a free market, products and services are traded (sold / bought) when their benefits of use reach their minimum / maximum value for each party of the trade, and the price of trade balances the difference.
Trade A trade occurs because the traded products have some benefit of use for the buyer, and the money has some benefit of use for the seller. A product has its minimum benefit of use for the seller (creator) immediately after creation because its purpose is to be exchanged for some other product, using money as intermediary. Basically, the product is of no (direct) use to its creator. The buyer needs a product, thus assigning a maximum benefit of use to the product. If the price of the product is too high relative to its benefit of use, the buyer skips the trade. Products, the result of some work, have no value to producers. Sellers assign no value to their merchandise. However, there are people who assign some benefit of use to products. These people are willing to pay for products. If the products are not sold, they have a zero value. So, the price of a trade is a factor which equates the benefit of trade (or simplified, the benefit of use) for both parties, not work, nor type of goods. While every human needs to eat (potatoes, in this case), not all people need a computer chip. People buy first the products with the highest benefit of use, then, if their budget still allows it, they buy products with lower benefit of use. The products with the highest benefit of use are those which relate to people's most basic needs, like food and shelter, which require no hi-tech to be manufactured. However, hi-tech products have low benefit of use because they don't address to people's basic needs. Thus, either the price of the chip is low enough so it can be bought by people who need it (people who at their turn are paid for the various products they sell), or the seller goes out of business and the hi-tech disappears from the market. This is the reason why technological improvements are not a threat to the balance of a free economy. Useless (or overpriced) products / services simply fade away. This is also why the risk of work, the physical and mental effort required to produce something have relative value. If a product has no benefit of use, the physical and mental energy used has no relevance in trading because there is no trade.
Value of work Work has several types of value:
If the output or trade values of work are lower than the input value, the work is inefficient and thus will fail providing at some point. However, some of the work can still be used because some of its input value (not time and energy) has been exhausted in the past.
Value of products Products have several types of value:
If the output or trade values of a product are lower than the input value, the process of production is inefficient and thus will fail at some point.
Competition What happens when there is competition? What is the immediate effect of competition: a price drop, or a drop in the benefit of use? A buyer, apparently, has the same benefit of use from a product, regardless of the competition of sellers. But if there is competition, a buyer feels less pressure to buy a product and can postpone the trade, since there will be a supply of the product at a later time, because the benefit of use of most products doesn't reach a critical level (which would require immediate purchase). As such, the benefit of use (= the stored usefulness decreases) for the buyer decreases when there is competition. Many times, a buyer wants to have some specific features for a product, and since competition represents an increase of the choices a buyer has, this specific benefit can be fulfilled only by some sellers. The only choice the others sellers have in order to turn such buyers into their clients is to decrease their prices, as the last factor which determines the final benefit of use of their products. So, when there is competition, each seller decreases his prices because each individual buyer has less interest in each individual seller's products, due to the increase of choices buyers have. It can be easily seen that when a seller decreases his prices way under the prices of his competition, he still can't attract more buyers than a given threshold. Only when everything else is the same do buyers generally choose the lower price. This happens because buyers want to fulfill their specific needs more than they want to be offered a lower price. The less beneficial a product is, the less is the buyer interested in fulfilling the needs which are satisfied by it, and therefore the more important becomes a lower price.
Crime Why is crime bad? It's very simple to put it: because only one side has benefit of use.
LoansIn order to have an efficient economy, loans (given by banks) must be in the form of paper notes redeemable upon maturity (called loan bonds), not in the form of the physical money (that is, the backing asset). Loan bonds have all the properties of the underlying asset (usually gold and silver), but have a few special properties:
The maturity and expiration dates can be absolute (like the end of the year when they are issued) or relative to the date when they are issued (like 1 year later). If loan bonds could be used for further loans, this would create pyramidal debt, which increases exponentially the risk for a chain reaction default (at the level of the entire society).
Cycle Let's say people go to a bank and deposit 100 millions units of money. They put 50 millions units in saving accounts, in order to earn interest. The saving accounts allow the bank, by contract, to loan the money from the accounts. A company comes to the bank to borrow 1 million units of money. The bank gives to this company loan bonds redeemable with 1 million units of money in one year. When the bank issues the loaned bonds, the physical money is associated with the bonds. This means that the depositor of the money no longer has access to the physical money. The bearer of the loan bonds will have access to the physical money when the bonds mature. Basically, the bearer owns the physical money. The company takes the bonds and promises, by contract, to return to the bank, with some interest, before the loaned bonds mature:
The company spends the loan bonds just like physical money. When the saving account matures, the bank returns physical money to the depositor, with interest. If the borrower has not returned the money, the bank must pay the depositor from its own profit.
Fractional reserve banking Today's system of deposits and loans works as a fractional reserve banking, where the apparent money supply is several times the real money supply. This method makes the economy function as if people would use "future" money. I could just as well write numbers on paper and "pay" people with such "money", and they would pay among themselves with the "money". As long as nobody would come to me to ask for real money, my charade would work. Currently, the apparent money supply (= the cash plus the debt) is about 5...10 times bigger than the real money supply (= the cash). The system works based on trust, that is, so long as people don't all try to redeem their deposits. The problem with this system is that it is a monopoly and is considered legal inside the banking system, while if it would be run by anyone else it would be considered (by law) fraud. The system does work as long as people trust it, but what really happens is that those who run the system will pay those who trust the system with debt in order to buy from them real things like land, buildings, work hours.
Preserving wealthThe best way to preserve personal wealth, from ancient times, was to keep one's savings in the form of gold and silver. Unfortunately, these days people make money in the form of non-backed and non-redeemable paper money. This means that people are exposed to whims of states and to inflation. Most people would think that the best way to preserve the value of their savings would be to keep the money in a savings account to accumulate interest. That is, however, false because the annual inflation is usually bigger than the annual interest for savings accounts. Don't use the "official" inflation to see that, just look at market prices (like food and rent prices). Also, savings accounts are at risk (of being lost) because of the fractional reserve banking used by most banks these days. This could determine some people to put the paper money in a safe-deposit box, to have total control over it. But, the problem is that there would be absolutely no interest to cover the inflation. Besides, if the system crashes, the paper money would be worthless anyway. This means there is only once choice, and that is to store one's value in the form of (physical) gold by buying it and store it a safe-deposit box; the fee for the safe-deposit box would always be smaller than the inflation of the paper money. Another way to store the gold is to buy GRIC. Some GRIC operators don't charge a percentage from your holdings, to store the gold, so your account's value is always the same. Another advantage is that you can also circulate your value in the form of electronic money. Of course, there is one disadvantage: your money is stored far away and you need Internet access to use it.
Strategy Let's say you regularly receive a fixed amount of paper money. You want to invest the paper money into gold. What trading strategy should you use? Remember that this discussion is about preserving wealth for time frames which span on years and decades. To do this, you have to regularly buy with the paper money which you want to save, a variable amount of gold. Let's say you have a monthly wage and buy gold once a week or month, using a part of your paper money (PM). The gold (expressed in weight) has a specific quote (GQ), meaning that the buyer can get a gram of gold for a specific amount of paper money. To buy gold, simply buy all the gold you can with the paper money you allocated for this. The amount of gold you will get is PM / GQ. This means that when the price of gold raises you buy less gold, and when the price of gold drops you buy more gold. This may seem weird to beginners since you would buy less gold when it's more valuable, but it follows a clear rule of investment: buy low and sell high. Any market has cycles. This means that the quote goes both up and down, alternatively. Thus, if you would buy a lot of gold when its price is high, after some time its price would drop and you would lose more than if you would have lost if you would have bought less gold. Basically, this investment method smooths your potential loses. In investments, it's more important to limit your loses than it is to increase your gains. Remember that the stated goal is to preserve wealth, over a long time frame, not to actively make money, so don't worry about the variations of the price of gold expressed in paper money. |
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