There is this notion of unlimited wealth that gets tossed around in financial circles. There is an unlimited amount of money to be made, all we have to do is make it. Really successful rich entrepreneur types like to say it’s like the money is out on the ground and all they have to do is pick it up.
Well that may very well be true, but there has to be a Yang to that limitless Yin. Money comes from somewhere, and I don’t mean a mint.
Money is an abstract concept that attempts to quantify value. Money is a mathematical unit of measurement, just like kilometers, seconds, watts, joules, BTUs, mpg and psi. Shopping, buying, purchasing, whatever you call it, is really just a trade or swapping of a good or service for a symbolic representation of the value thereof (money). Currency is the symbolic representation of that value.
Way back in ancient times before money was invented, people bartered. If you had sheep you’d trade a sheep to the guy who had wood, or fruit or any other thing you didn’t have because he didn’t have any sheep and was in the mood for nice big plate of mutton.
As societies developed with rules and kingdoms, kings had to have armies. If you’re an ancient king, how do you get people to fight for you? You take care of them in exchange for them doing your dirty work for you. In those times that meant giving each soldier a daily ration of grain or meat or barely or whatever the staple food was of the society. The notion was the king would take care of his troops. Well sometimes the weather wouldn’t cooperate and there were floods and droughts, and there was no staple food to pay off the soldiers. So someone got the bright idea to give the soldiers something they could trade for food, since the king didn’t have any food to give them himself. Money was born. Maybe it was a nice shiny rock, maybe it was a royal IOU. At any rate the King got out of the catering business and just issued money to his soldiers and said, sorry I’m out of food, so here take this and go see if someone will trade you some food for it.
So it’s clear to see the original if not the true notion of money is as a place holder for “goods or services due.” And “goods or services due” means a debt. For every Dollar, Euro, ruble, peso, or yen issued a debt for the same or more is also created. This gives us the following formula:
Wealth = Debt
Wealth is an accumulation of monetary value which means an uneven trade occurs at some point. In a regular purchase an item is assessed to be of a given value and then is traded for the symbolic representation of that value in currency. In a fair trade value does not change hands only the form in which that value is stored. One of the ways value is stored is as a debt. In fact, money used to be nothing but a debt for gold. Now that we have abandoned the gold standard, money is a debt for value. In order to generate wealth, a debt must be created. At some point an uneven exchange must occur, otherwise in a fair trade both sides acquire the same amount of value of which they surrendered.
The most obvious method of an uneven exchange (note that uneven does not necessarily mean unfair) resulting in a debt is interest. In order to borrow $100 at 10% interest from the bank, you have to pay them back $110. The bank accumulates $10 in wealth from the deal, while you incur a debt of $10 beyond the value of the original loan sum of $100 (more on the implications of the interplay of debt and wealth in a later post). Notice that the bank is not generating new wealth it is merely accumulating, or consolidating it from you and the rest of its lendees. Now it’s up to you to somehow take that $100 and convince someone else that its value is actually $110. This is possible because value is subjective. And as money is a symbolic representation of value, it is subjective and abstract.
So what does all this tell us?
It explains snobbery. Rich people are snobby because they realize their accumulation of wealth is really an accumulation of value, ergo they feel they are more valuable than the rest of us.
It not only explains why a country as decadently rich in resources like the USA can be 13 trillion in debt, it actually presupposes it has to be so in order for other countries to prosper. Debt is kind of the way we share the wealth.
It explains how a dollar is a dollar is a dollar is not always a dollar. Monetary Wealth cannot be created or destroyed by producing more or less currency; it can only be accumulated and consolidated from many hands into one, through the process of debt. However value, as a subjective abstraction, is ultimately a psychological construct that can increase or decrease relative to an individual.
Economics is not a hard science. Markets are not governed by universal laws like physics. Yes, markets are influenced by supply and demand, but not exclusively. Markets are not closed systems impervious to external factors. Economic development is psychological warfare. Were this not so there would be no need for salesmen, stockbrokers, or advertising. Value only truly exists in the mind; ergo money is a psychological manipulation imposed on humanity generation upon generation.