We all use money on a daily basis, but do you really understand how it works? This article is a little bit different from the usual, as I will propose alternative ways of valuing money and looking at the economy as a whole. If you've…
We all use money on a daily basis, but do you really understand how it works?
This article is a little bit different from the usual, as I will propose alternative ways of valuing money and looking at the economy as a whole. If you’ve been following my latest writings, you’ll understand my views on cryptocurrency adoption depend a lot on price and the role of technology Arguably, our own understanding of money will influence how cryptocurrency develops and that is exactly the subject of our discussion today. I’m definitely interested in reading your comments down below or on Twitter; Seriously, don’t be shy, if you have insights feel free to share!
Now, why are most economists ignoring the role of money in our society? They assume that it is centrally controlled by agents who make decisions on our behalf? Like allowing central banks to control interest rates by printing and selling more/less money to financial institutions? Even worse, today we endow private institutions the power to create currency: through debt.
How can we bestow our financial freedom to private agents whose interests rarely align with that of the common man?
Today I come bearing a different proposal.
Just like the separation of powers between the Church and State, I feel money should be controlled by no one. Much less by a few people who believe they have enough knowledge to make decisions about the cost of things, how much you’ll earn or how much your money will be worth in a few months.
I understand the purpose of government-issued currency but at the same time, I believe we are giving away too much power – and as you guys know, power easily corrupts people. Especially when we consider the lack of transparency in the banking system. I mean, it seems pretty easy to do whatever you want to do behind these curtains, protected by complex banking laws and extremely powerful lobbies.
I would much prefer if all institutions used a transparent ledger, like Bitcoin. At least it would be harder to bend the rules if they did have to answer for certain transactions.
The truth is, fiat currencies are doomed to fail without exceptions.
I made an info-graphic. There are 152 fiat currencies that have failed due to Hyperinflation. Their average lifespan was 24.6 years and the median lifespan is 7 years. 82 of these currencies lasted less than a decade and 15 of them lasted less than 1 year. from Bitcoin
If you still think the problem lies within the model, but not with some of its assumptions, then please consider the case of the oldest fiat-currency in existence; the good ol’ British pound (Sterling/GBP).
Did you actually know its original value in silver was about 340g (12 oz)? This is, 317 years ago £1 would purchase about 0.75 pounds of silver.
How much do you think its worth today? At current prices, you need around £118 to purchase 12 oz of silver.
Congratulations. That simply means the oldest fiat-currency in existence has lost about 93-95% of its original value.
It’s up to all of us to stop being naïve and truly seeing money for what it is.
Pro-tip: no, money does not need to be a fiduciary currency in order to properly function as a stable medium of exchange. Having someone (or a restricted group of people) deliberately deciding the future of the money supply has been the root cause for most, if not all, recent economic crisis.
What is money after all?
Classical economists define money as a combination of the below properties:
All these definitions are, of course, attached to a pre-condition found in the Neoclassical School of Economics. This is, money is simply an attribute of the economy and not the economy itself. Is this definition as complete as it could be? Or is there something else to money?
I’m going to steal from the great David Orrell, and use his brilliant definition of money :
Money is a way of combining the properties of a number with the properties of an owned thing.
Money is our way to attribute value to things, in order to exchange with one another or to store value. Without it, it wouldn’t be possible to trade globally.
Andreas Antonopolous adds something else; a poetic complement to David’s definition. He states that money is nothing but a language.
By combining both definitions we get to a higher level of clarity: money can be defined, then, as a way to value to things so that we can communicate and trade among ourselves.
Just as the famous theorist and physicist Karen Barad states existence is not an individual affair, so how could money be?
Being part of a network requires money to be accepted by the majority of members, which can be a problem due to our untrustworthiness.
Although I believe most financial problems happen due to miscalculated money-creation and money supply mismanagement, there is an underlying trust (or faith) pillar in our concept of money.
A thing worth discussing, which explains our behavior towards money and understanding of the subject, is how different schools of economics have solved the trust issue, for the comfort of modern society.
It all started a long time ago, in a galaxy (not) far, far away.
Since the Babylonian times, fiduciary (or fiat) money has been around. The purpose was a little bit different, as this type of money was created with the goal of financing geographic conquests. What history teaches us is that the only incentive authorities and rulers had to reward soldiers, came into existence by enforcing a currency within all conquered land.
It became possible for kings to quickly finance wars by collecting taxes from conquests and by paying wages to warriors with a centrally minted currency.
This form of money allowed kingdoms and empires to boom for one obvious reason: the one who holds the most coin, or its minting source, and then finds a way to enforce said coin on other people, becomes the most powerful.
Hence, power = money.
Instead of depending solely on precious metals (silver, gold, ore), by creating another proxy of value on top of said metal (usually by depicting the face of the ruling emperor/king/queen), it became possible to create virtually any desired amount of currency supply in the market.
The fiduciary system long-term effects have been observed, time after time, with the rise and fall of so many world empires: the Babylonian Empire, The Greek Empire or even The Roman Empire; all are great examples of how unsustainable a fiduciary system can be. The reason being, growth eventually slows down which leads central authorities to print more currency causing said money to devalue.
Could a new solution to the trust problem be found deep within the quantum entanglement between money and currency?
Albert Einstein wrote that time is relative, meaning, we experience time differently from one another depending on our mass and speed. That’s why astronauts age differently from the rest of us.
Consider the following: you have 1 million Dollars sitting in your bank account. Are you a millionaire?
Well, it depends on the unit of measurement, doesn’t it?
If I transact using fiat, then I would consider you a millionaire. Now, If I transact in cryptocurrency, then your 1 million dollars is only worth a couple hundred Bitcoin.
This is, the value of money differs from person to person, due to their geographic location, laws or beliefs system.
To some, Bitcoin is worth nothing because they see no value in using it or holding it. To others, fiat currency will eventually blow up all over our faces and its only purpose is for purchasing.
Even when you’re considering the same currency, such as Bitcoin, it holds different values depending on where you are. If you’re in India or Venezuela, somewhere where Bitcoin is actually scarce and hard to come by, I’m sure you could sell it for a larger margin than on traditional cryptocurrency exchanges.
The price of any good is likely to be more expensive when there is less of it. As well as, the fewer the people who are selling it (illiquid markets), the less you are likely to profit.
This value is always relative.
We see prices being created due to the fluctuations of demand and supply, but that’s hardly what happens. Prices are set due to a variety of reasons some of which might seem logical. That doesn’t mean, of course, prices have a rationale or are explained by supply and demand only. In the end, a value can only be dictated by prices – which do not exist until a transaction takes place.
Take a house, for example. You may think it costs USD 500,000.00, however, if you make a cash bid for USD 250,000.00 and the owner accepts it, then its price is set at USD 250,000.00.
Transactions define prices, not supply and demand.
Of course, prices are connected to how much money people are willing to pay for certain goods, services, and assets; however, as we are not economically rational and we do not have access to perfect information, it’s quite hard to agree with the assumption demand and supply dictate prices and not the other way around.
One thing is certain: if transactions define prices and prices are always relative (as they dictate value), we could, perhaps, make the assumption all money has quantum-like behavior, in the sense transactions can only happen between two or more parties. That is, a value cannot be created in isolation. It needs a plurality of parties – opening the door to the application of quantum mechanics physics to money.
Everything in our fragile world is connected. Call it energy, entropy, destiny, fate, it hardly matters; the point is: like particles are entangled so is money.
In quantum physics, whenever two particles are connected information registered by one particle will affect its counterpart.
What are debtors and creditors but economic agents whose money is entangled?
By contracting a debt you owe someone a certain amount of money, which states that someone else is entitled to receiving that money. Like entangled particles, whose fate is dependent on one another, so is the creditor’s money dependent on the debtor’s money.
However, if you think these are just different terms for known events, like contracts, defaults, etc, I urge you to reconsider. A contract, for example, is a way to express rights and duties between a set of economic agents. That’s not the same as entanglement, as the latter expresses the universal way of connecting things. If it sounds too weird, think of it like this: you can’t really measure the state of a certain sub-atomic particle, because the act of measuring it will change its position. Logically, there is a cause-effect between linked particles. When one is affected, so is the other.
In other terms:
While a contract expresses the nature of the relationship between agents, entanglement expresses the connection between their money.
If there is a contract between two agents, any money attached to that contract will be affected by the other parties’ money.
*For those who think entanglement is a physicists thing, I’ll have you know it was firstly introduced in economic terms by non-other than John Maynard Keynes, the father of the Keynesian economics, so many of you love.
If all money is entangled, how should we measure it?
As explained above, fiat-currency was introduced as means to expand one’s capacity of money creation and to solve the trust problem; it’s now time to address the elephant in the room: how is growth perceived and how to measure it. If fiat-money fosters unstoppable growth, having little care of how money is redistributed among all economic participants, there seems to be another misconception about our current financial system. One that is vital.
I really do not understand how can growth promote stability, if the only way we grow is by uncontrollably printing money to boost the economy.
If we base our logic in profit-making, we will always get stuck at measuring success by each countries GDP’s or the average Joe’s utility level for X product consumption (whatever the meaning of utility is).
There are, however, other ways to measure the success of each individual agent. For example, the doughnut economy teaches us how to value the environment instead of calling it an externality and tries to calculate the impact of pollution in dollar terms, could potentially shift our own wealth creation thinking process.
Economics usually measures happiness with a mechanical approach. Just as in thermodynamics, we are beings converting energy into work – so logic dictates that the happiest beings are the ones who can spend less energy and create more work.
In other words, the less energy you spend and the more work you get done, the happier you are. Translating work into money, we can argue that the more money you make, from each individual unit of energy spent, the happier you are.
In general, the more money one has the happier that person is. But measuring economic growth by itself does not correlate to the general population’s happiness. The key metric is, of course, how much money does everyone have.
Our target should always be to promote measures that raise the minimum bar and not the maximum.
The most important property of money, its entanglement, dictates the value of a single dollar will not only affect the person receiving it but the entire group as a whole. As it happens within networks, the more redistributed money is, the more all agents benefit.
If I receive more money, I will most likely spend more of it; so on and so on.
The fact more agents have more of it also means the likelihood of said agents spending it with other agents’ increases. This domino effect is what matters: the more I benefit, the more others benefit as well.
An example used by many economists to understand the above concept is the following: when slave-trade finally ended, economies boomed because the people who were working the hardest and not being fairly rewarded, could finally accumulate wealth. The said wealth was most likely being spent in the same economy due to geographic restrictions. That’s why the velocity of money argument (how fast it changes from hand-to-hand) is brought up so many times when discussing the usefulness of bitcoin (as a means of exchanging value). Of course, as any data scientist would tell you, velocity by itself means nothing.
Data can only tell you a story if you know how to ask the right questions. We need to do an effort to better understand what is happening at the micro level (or quantum, perhaps?), otherwise, we might not see what is right in front of our nose. Jimmy Song explains this bottleneck quite well, by stating there is little intelligence gathering from simply looking at how much is being spent instead of how is that money being spent.
Instead of valuing money due to its velocity I would argue the store of value purpose should dictate, in the long-term, people’s preferences.
Independent of my feelings towards fiat-currency the truth is that it works as a currency because people trust it will be accepted by other peers. This property has become attached to our definition of money, as most consider for an asset to be considered as money it needs to be accepted by many.
Except we cannot really put a number on “the many”; the fact there are hundreds of different fiat-currencies proves that exact point. So far, the line has been drawn geographically and politically.
A slightly different approach is to base our assumption, however, what people need is a way to convert some money into a proxy accepted by many, not to hold the actual currency accepted by others.
That proxy may or may not be a fiat-currency.
Before we dive into the last bit, let’s recap on why fiat-currencies are widely used nowadays:
Due to the emergence of Bitcoin, and its proven resilience to price swings, crashes, and manipulation, both properties can (and will) eventually disappear.
If the enforcer of trust is a set of mathematical rules (much like within the HTTP protocol), there is no need for a social enforcement of trust. Why would any government block a currency whose ledger cannot be hacked or altered by any party, while at the same time, providing financial freedom through permissionless access and use?
As the long-time Bitcoin investor and maximalist, Richard Heart puts it, the Bitcoin blockchain is nothing but a “giant excel spreadsheet with some passwords, and some fancy fault-tolerance transaction ordering”. So I ask, how can anyone block it?
Because there are no geographical borders to the virtual realm, that same currency can be exchanged anywhere in the world, as everyone would speak the same language.
Can you already see the immense value a true sound-money-like global currency can bring, not only to people in developing countries, or where hyperinflation is a reality but to every single one of us?
I really hope you do.
The power of inter-exchangeability will only improve commerce and wealth distribution. The more we develop models where network-based agents are continuously rewarded, the more power we’re giving everyone. If networks grow exponentially, why can’t your wealth do the same?
By combining the logic of network-based enterprises with the quantum properties of money, we can hopefully destroy the debt-based system by allowing for new forms of value to be created and exchanged.
If a company creates a token with certain utility mechanics – let it be governance, voting or in-app purchases – and rewards its network of users with company tokens for participating, who’s to say we won’t value said token as money?
Maybe, soon, we’ll find it is deep within our nature to centralize power and, however mechanisms created, the end result will always be the same. A completely rigged game favoring the few instead of the many.
I hope that is not the case and we learn from our past mistakes.
Don’t forget what the yin and yang teach us: there is always a dark-side to light and a light-side to darkness. Nothing and no one is entirely good or bad.
Money is just an extension of ourselves; our goal is to have more of it, so we think about our own well-being first. However, it is also within our nature to be kind to others, to go out of our way making huge sacrifices for family and friends.
Seems to me the economic rational man is a tiny bit more complex than what we thought.
The key ingredient missing, in my opinion, is how value is created; why base our monetary system in fiat-currency and not sound-money? Why accept policies which destroy value? Why shouldn’t we seek a transparent system, harder to take advantage of?
I’m sure one day I’ll be having a conversation on how decentralization created a new monster for our societies. Will a better redistribution of value create new issues? We cannot foresee.
But as for every empire, there is a rebellion, I too believe, for every problem, there is a solution.
Building a better world starts with changing our perception of how value can be created and redistributed.
Thanks for reading! Share your opinion and thoughts down below.
Featured image from Shutterstock.
Last modified: January 24, 2020 10:59 PM UTC