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May 18, 2011 / 74

Some Monetary Basics Pt IV

Initially published, Dec 24, 2008 (Edited and expanded 5/17/2011)

Okay – NOW we get down to the IMPORTANT stuff… EXACTLY WHAT IS MONEY/CURRENCY?

Let’s start out with the illustration, then the definition/summary. I think it will be easier for you to follow the concepts that way.

So, let’s say that you decide to go into the lawn mowing business. Okay… you hoof it up and down the street, trying to get your neighbors to “hire” you to mow their lawns. You finally find one, and the two of you agree that you should mow and trim his lawn, and he’ll pay you $25 for the job. So you get busy and do a great job, and he hands over a 20 dollar bill and a 5 dollar bill – transaction complete.

But IS it? No.

What really happened in the above paragraph? You agreed to give up a part of your life and perform a service. Your neighbor agreed to give you a couple of pieces of paper that according to current convention, represented a certain value that you could exchange somewhere for something that you value. So you do that. You ran over your foot with the lawn mower while you were doing the guy’s lawn, so you need a new pair of boots. You take the $25 in paper money to the store and find a cheap pair with steel toes (so you don’t whack your toes off if you run over them again.) And for purposes of our illustration, those new boots cost EXACTLY $25, and there is no sales tax.

So you traded your time and lawn care skills for a new pair of boots. But you didn’t get the boots from your neighbor. What REALLY happened, was you did the work, and your neighbor gave you an IOU for the boots… or for something. Then you gave the currency to the shoe store clerk, who will then use it to pay an employee, or to buy a box of shoe laces or something. So your work has now purchased a pair of boots, and whatever the shoe store owner will in turn exchange your neighbor’s debt for something he needs.

But how did the shoe store owner know that your neighbor owed you a pair of boots? He accepted the currency/money as valid representation of the debt owed to you by the neighbor (or someone), and he presumed that the neighbor was good for the debt. BUT – he doesn’t KNOW the neighbor – so how could he trust the IOU?

So… having written at length as to how money/currency is used, and such, we now, FINALLY come to EXACTLY WHAT money REALLY IS!

Money/currency is “Nonspecific Debt.”

That means anyone can collect the debt, or transfer it to anyone else, and it’s as valid as if you wrote a contract with specific names and conditions in it. Why did you take the $25 from your neighbor? Because you ACCEPTED that someone else somewhere else would redeem those notes for something of reasonable value. And the shoe store owner did the same thing when you traded him the paper money for the boots. So you exchanged labor, part of your life, for some unknown person’s promise to pay you something of value in exchange at some time in the future.

So modern economies don’t just create debt by borrowing money – they RUN on debt.

So when you “save money” what are you doing? You are holding someone else’s debt. Can it evaporate? Sure can. How do you make sure that you have value instead of debt? You have to redeem that debt/money for something of value so that if the non-specific debt is defaulted on by the sponsor of the paper (government?) – YOU don’t get stuck holding the bag.

CAN you “save for the future”? No. At least not by hoarding money. There is a simple economic/accounting reason that it is impossible to “save for the future, and it’s the reason Social Security can’t work.” It is this;

CURRENT OBLIGATIONS MUST BE PAID WITH CURRENT RESOURCES.

If you have a US Savings bond, can you buy food with it? Probably not because like money the savings bond represents debt – but a different kind of debt than money. A US Savings bond is SPECIFIC debt – which is to say that the Government (one specific party) owes YOU (the other specific party). So before you can redeem that debt (spend it), you must convert it from specific debt to NONspecific debt (money) or change the specified parties. And since you have no way of knowing what the value will be, or will not be of future debt (due o inflation, deflation, default, etc), you cannot save for the future. If you seek to “save” for the future, to “put aside” the fruits of today’s labor/time for use at some time in the future – the ONLY way to do that is to currently redeem your non-specific debt, and your specific debt for some asset, some item of value, that will reliably return CURRENT income/revenue in the future. The classic such investment would be to buy a liquor store. Another classic strategy is to “think generationally” – which is you take care of your parents, and your kids take care of you, and you all build he family’s wealth through the generations.

And just as a sort of extra value thing here – gold, silver, precious metals, gems, etc are no different than corn, beans, and carrots. They are not magic, they do not “hold value” any more than any other commodity. If you think gold is some mystical stuff that will hold value through the ages – you need to talk to the Saudis who decided to abandon the petrodollar for gold. (They refused to be paid for oil with US dollars and demanded to be paid in gold. After a while of other nations paying for oil with gold, the price of gold went up and up – from somewhere around $200 USD an ounce, to over $800 USD. Then the Brits, who IIRC controlled the price of gold at the time DROPPED the price to back to around $200 USD. Again – IIRC, and the Saudis returned to taking USD for oil.) I found the outcome of that situation highly amusing.

And it also illustrates another principle – just because a bushel of corn sells for $8 USD today, does not mean it will do so tomorrow. The value of commodities floats against other commodities and against currencies. And always remember – metals like gold, silver, platinum, copper, etc are commodities. So the idea of hoarding gold to protect against a crash of the value of a currency would probably be an ineffective strategy since the dollar price o gold will fall with the rest of he commodity prices. Will it increase in relative value? There is absolutely no way to know that.

Do I own gold? Not an ounce. Can’t eat it, can’t use it to stay dry in the rain or warm in the winter. Unless someone else wants to trade me for something else that’s useful, gold is worthless. And besides – the mythos that has developed around the stuff over the ages makes it dangerous to own. I’ll take my commodities in non-GMO food.  🙂

Generally, I think that people who understand the NATURE of money, and the role it plays in our economic lives, have a better chance of doing well when it comes to ordering their own economic lives, than those who don’t. But that’s just my opinion.

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One Comment

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  1. Steve Picray / May 18 2011 06:53

    If currency is “nonspecific debt” then does that mean that all this time I’ve been praying to be “debt free” I’ve really been praying to be broke?? Man, do I need to fine tune these prayers!

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