munKNEE.com Your Key to Making Money
Have you ever wondered what money really is [and why we need to own some gold as a result]? You’ll notice that everyone you read has a strong opinion , but who’s right? [Let look at the situation and see if we can come to an answer that we both can agree on.] Words: 3086
So says Danny B (www.fofoa.blogspot.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The report’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
The article goes on to say, in part, that:
Is money really just one single thing and then everything else has varying levels of moneyness relative to real money? [For instance:]
- is gold real money?
- is money whatever the government says it is?
- is money whatever the market says it is?
- is silver money in any way today?
- are US Treasury bonds money?
- is real money just the monetary base or is money all the credit that refers back to that base for value?
- is money supposed to be something tangible, or is it simply a common unit we use to express the relative value of things?
- is money really the actual medium of exchange we use in trade or is it the unit of account the various media of exchange (checks, credit cards, PayPal) reference for value?
- should the reference point unit of money itself ever be the medium of exchange? Some of the time? All of the time? Never?
- is money a store of value and, if so, for how long?
- is money supposed to be the fixed reference point (the benchmark) for changes in the value of everything else or is it simply a shared language for expressing those changes?
- is money something that changes over time or is money’s true essence the same concept that first emerged thousands of years ago?
- and probably the most important question: does the correct view of money produce answers that are vastly superior to the blind conjecture prescribed by all other views.
Answers
Everyone has a strong opinion about what money actually is so “everyone” will probably disagree with what I write but that doesn’t mean they are right and I am wrong. I want to challenge you to use your own mind and see for yourself. Take what I say and then take what they say, compare, contrast, analyze and then decide for yourself. The prescription produced by my view is quite simple – and only you can decide if it is vastly superior to their blind conjecture.
The Pure Concept of Money
According to Webster’s the word ‘money’ emerged in the English language sometime during the Medieval period in Europe, maybe around the late 1200s. Wikipedia suggests a possible etymology originating with the Greek word for ‘unique’ or ‘unit’. The Western term for physical coins that emerged sometime around the late 1500s was ‘specie’ from the Latin phrase for “in kind” or “payment in kind,” meaning “payment in the actual or real form.” The word ‘currency’ came a little later from the Latin word for current or flow, and was married to the money concept in 1699 by the philosopher John Locke who described the “circulation of money” as a flow or current of monetary payments made in specie.
Etymology is important, because with money or “the moneyness of things” we are talking about a vital concept that predates the word by thousands of years and it’s only by understanding the pure concept that we can see the ways the word has been bastardized by…[the debtors and the savers] over centuries. The meaning we commonly assign to words may change over time, but that never changes the original concept underlying the emergence of the word in the first place.
Case in point: Is ‘money’ equal to ‘wealth’? Is “gathering wealth” the same as “gathering money?” [Such an understanding of just what those words actually meant in the language of the time can be seen in the way Proverbs 13:11 was translated over the passage of time]… and which I think will help to illustrate my point about words and concepts:
(Wycliffe Bible 1395) Hasted chattel, that is, gotten hastily, shall be made less; but that which is gathered little and little with hand, shall be multiplied.
(King James Version 1611) Wealth gotten by vanity shall be diminished: but he that gathereth by labour shall increase.
(Young’s Literal Translation 1862) Wealth from vanity becometh little, and whoso is gathering by the hand becometh great…
[The Living Bible Version 1967) Wealth from gambling quickly disappears; wealth from hard work grows.]The point is, your modern understanding of ‘money’, and the pure concept of money that emerged long before the word, may be substantially different things. I’ll go even further to say that the modern understanding of money is so confused and disputed by the two opposing money camps [the debtors and the savers] that the only way we can hope to have a clear view of what is actually happening today is by reverting our understanding to the original concept, before it was corrupted by the two camps so now let’s go back to the etymology at the top of this section… If we look at the specific etymology I highlighted, we are pretty close to the pure concept which I will confirm from a couple different angles [as follows:
‘Money’ is a “unique unit” that we use as a kind of language for expressing the relative value of things other than money. The modern example would be “dollar”. Not “a dollar,” not a physical dollar, but the word “dollar” as it is used to say a can of peas costs a dollar, or my house is worth 100,000 dollars, or you owe me a hundred dollars. If you give me two grams of gold you won’t owe me a hundred dollars anymore. You don’t have to give me actual dollars. That’s just the unit I used to express the amount of value you owed me. That’s the pure concept of money.
This is where it gets a little tricky and mind-bending. The actual physical dollar, that physical item we call “a dollar,” is not money in and of itself. In other words, it is not intrinsically “money”. It is only money because we reference it when expressing the relative value of goods, services and credit. If we stopped referring to it, it would cease to be money even though it would still be a dollar. Can you see the difference? Like I said, it’s tricky.
A dollar is just a thing, a tradable item and it will continue being that same thing even if we stop referring to it when expressing relative values. It will still be a dollar, it just won’t be money anymore. Therefore it is not money in and of itself. It is just a thing. Take the old German Reichsbank marks from 1923. Some of them still exist. They are still marks with lots of zeros but they are no longer money. We can still trade them. I might trade you a few Zimbabwe notes for an original mark, but that obviously doesn’t make them money. The same goes for gold. Gold is just a tradable item.
We could be using seashells as money. If we were, then all the seashells available for trade would be the monetary base. That’s the base to which I would be referring when I said you owed me one hundred seashells. A single seashell would be the reference point, the unique unit, but the whole of all available seashells would be the base around which money flowed. You could pay your debt to me with either an item that I desired with a value expressed as 100 seashells, or with 100 actual seashells. So if the total amount of seashells available (the monetary base) suddenly doubled making them easier for you to come by, I’d be kinda screwed. Of course I’d only be screwed if the doubling happened unexpectedly between the time I lent you the value of 100 seashells and the time you paid me back.
Getting back to our etymology, the concept behind the term ‘specie’ meant actual units of the monetary base. In the 1500s, that was the total of all metal coins-of-the-realm available for trade. That was the monetary base of the day and the term ‘specie’ arose as a way to express payment in the monetary unit itself rather than payment in bulls, or hats, or anything else but original concept aside, the meaning of the word became married to coins and stuck to this day as defined by the Online Etymology Dictionary which says: “Specie: 1610s, ‘coin, money in the form of coins’ (as opposed to paper money or bullion), from phrase in specie ‘in the real or actual form’ (1550s), from L. in specie ‘in kind,’ ablative of species ‘kind, form, sort’.”
Notice it says “coins… as opposed to… bullion.” That’s because while gold coins were referenced in the use of money at the time the word ‘specie’ emerged, gold bullion was not. “Gold” was not money in and of itself. It was just a thing; a tradable, barterable item. Notice also that it says “money in the form of coins.” The coins themselves were also not money in and of themselves. They were only called money because, in that coin form, they were the monetary base that was referenced when expressing the relative value of everything else at that time. Some of those gold coins from the 1500s and 1600s still exist today. Today they are not money, but they are still gold coins. Can you see the difference yet?
Now remember, there’s no right or wrong at this point. There’s only the usefulness of a perspective in delivering the correct analysis of what’s actually happening today and the best prescription for your personal action. You can’t use a perspective until you get it and then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect…
The pure concept of money is our shared use of some thing as a reference point for expressing the relative value of all other things. Money is the referencing of the thing, not the thing itself…Money is a value stored in your head! Money is not something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item… the value is in your association abilities. This is the money concept, my friends…
The Monetary Base
The big secret [about money, however,] is that the people’s money is simply credit and by “the people’s money,” I mean our money, the real producing economy’s money. The monetary base is only the banks’ and governments’ money, except for that little bit of cash you keep in your wallet for emergencies. Let me explain.
Today’s monetary base is a clearly defined thing – it is all physical currency plus reserves held at the Fed. We the people cannot have electronic base money. We cannot open an account at the Fed – only banks and the government can. We use commercial bank credit and private credit to keep the economy churning. The reference point of our credit is the base. We reference that base when we transact in “dollars”.
Private and commercial bank credit appears and disappears spontaneously all the time, all throughout the real economy. This is what actually lubricates the economic engine; having a base of stable value to which we refer in monetary transactions. Private credit is generally cleared using bank credit and bank credit is cleared using the monetary base – but all credit denominated in dollars refers to that base and relies on a stable unit value or price stability.
It is the banks’ job (both commercial and central banks) to make sure that bank credit (the people’s money) and base money (the banks’ money) are fungible. That is, they are always freely and equally exchangeable…[although,] of course, they are two separate things, credit and base money, with two very different volumes. Under normal conditions, there’s a lot more credit money floating around than there is base money so keeping them fungible can be a juggling act on occasion. For the most part, however, we the people choose to hold bank credit as our money rather than cash and, in fact, it is the limited availability of cash in the system (its relative “hardness”) that keeps our money stable in unit value.
Think about it this way: We are free to choose cash at any time and when we go to the bank to exchange our credits for cash, we put that bank under pressure to come up with cash that is relatively “harder” to come up with (more limited in volume) than credit. Let’s say, for example, that “demand deposits” (those that can demand cash on the spot) are ten times larger than the total volume of cash in the system. Is this good for our money? Yes, because it means that the reference point unit we use is in limited supply, which keeps a vital tension on the overall system. The operations the bank must do to come up with our cash (sell off some value) maintain value in our credits.
Monetary Debasement
Say the base volume is one trillion dollars, which is about what it was in October of 2008. That means the base unit reference point for all dollar credit in the world is one one-trillionth of the base volume, all the available above-ground dollars ever mined throughout all of history. Then imagine you doubled that base to two trillion dollars. The unit reference point will have been cut in half, from one one-trillionth to one-half of one one-trillionth of the base volume.
Say you’ve got a contract or a credit for a kilo of gold. Now obviously the total volume of gold can’t be doubled overnight like the dollar base was, so what would be the equivalent effect? Well, it would be like someone cutting that reference kilo in half. Your one kilo contract, since it is denominated in kilos, refers to this unit reference point that has just been cut in half. It has suddenly become twice as easy for your creditor to deliver on his obligation. By the way, the volume of the dollar base has more than doubled since Oct. 2008. It’s now at 2.7 trillion, which means the unit reference point was actually given a 63% “haircut” in three years, from one one-trillionth to little more than one-third of one-trillionth of the total volume.
Now, before you start arguing your own favorite economic pet theory, let me remind you that there is no right or wrong at this point. There’s only the usefulness of a perspective in delivering the correct analysis of what’s actually happening today and the best prescription for your personal action but [remember,] you can’t use a perspective until you get it. Then, and only then, you can use your own mind to decide if it is the correct perspective and then act upon it. Later it will be proved correct or incorrect.
Clearly the 63% destruction of the dollar unit reference point over the last three years did not immediately translate into a 170% rise in prices at the grocery store and I wouldn’t expect it to. It never works like that. Henry Hazlitt explained it like this: “The value of the monetary unit, at the beginning of an inflation, commonly does not fall by as much as the increase in the quantity of money, whereas, in the late stage of inflation, the value of the monetary unit falls much faster than the increase in the quantity of money.”
If you have a large 401K, IRA or pension fund full of credits for dollars, you may be taking comfort in the fact that the 63% haircut in the very unit your retirement nest egg references has not yet shown up at the stores where you shop but the fact remains that the dollar has been debased. That’s why they call it debasement. The base is diluted by expanding its volume which reduces the value of the unit used for reference relative to the volume of available units.
There are, of course, plenty of economic theories out there that are wholly designed to distract your attention away from this plain and obvious debasement and to tell you why it doesn’t matter, and how the presently slow price inflation is proof that it doesn’t matter if they debase your money and your life’s savings. Some will tell you that the apparent fungibility of credit and cash means they are the same thing. Some will even try to tell you that the base unit reference point derives its value from the volume of credit rather than its own volume, and that the base volume is essentially meaningless but I think that if you are keeping your wealth in the form of money, sheep being periodically sheared is an image worth keeping in mind.
The Pure Concept of Wealth
Another concept of concern today is that of ‘wealth’…The fundamental property of wealth is that of “possession.” It is by this property that wealth is identified, and thereby it becomes ‘wealth’. In the world of wealth, worth is enhanced because the supply is lessened by this ‘possession attribute’ and possession is how most people in antiquity understood wealth.
Have you ever noticed how the super-rich seem to stay super-rich no matter how much money they spend? Not only that, but they seem to get wealthier the more they spend! They buy amazing super-homes, expensive antique furniture to fill the homes, and priceless artwork to hang on every inch of their fancy walls, yet somehow they retain their wealth. That’s not to say that they don’t also participate in the Western tradition of “the something for nothing game” we call the paper markets. They do, but that participation does not constitute their ‘wealth’ yet we, the commoners, are told constantly, by state-approved financial advisors, to put our entire nest egg at risk in this “something for nothing game.”
We can’t afford that nice furniture and art that the super-wealthy buy, so we buy low-priced crap from China that is worth half what we paid for it the minute we walk out of the store. What is going on? Is it possible to imagine a new monetary system that would put common people on equal footing with the super-rich when it comes to possessing our wealth?
In this world we…must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us – and that is GOLD!
Evidence shows that the U.S. money supply trend is in the early stages of hyperbolic growth coupled with a similar move in the price of gold. All sign point to a further escalation of money-printing in 2012…followed by unexpected and accelerating price inflation, followed by a rise in nominal interest rates that will bring a sovereign debt crisis for the U. S. dollar with it as the cost of borrowing for the government escalates…[Let me show you the evidence.] Words: 660
5. Fiat Money: Exactly What Is It? Why Is It Such A Scourge?
Considering the fact that you can fool some of the people some of the time but you cannot fool all of the people all of the time, is it any wonder millions, both through the Tea Party demonstrations and now the Occupy Wall Street Movement across the country and elsewhere around the world, are protesting the abysmal scourge that fiat currency has brought upon us as a result of that fateful day back on July 25th, 1965. To appreciate the significance of that historic day we must fully understand what fiat currency is and why such a concept is about to implode and this article does just that. Words: 1372
6. Egon von Greyerz Interview on Future QE, Hyperinflation and the Price of Gold