About The Money In Your Pocket...Or Your Bank: Creation And Evaporation of Value

As I briefly explained in this other post, money is something that has always interested me.

Saying something like that in public is not very popular, at least in certain societies. Many times the listener thinks that "you like money", as if that was a bad thing.

And in fact, I don't like money itself or dislike it, but I do love what it represents: freedom for some and slavery for others.

We live in a world where the vast majority of people are "forced" to work, meeting certain schedules and following orders for at least 5 days a week. And this has always been the case. In prehistoric times the same thing happened: if you didn't feel like hunting a mammoth, you didn't have food. Human beings always have had to exchange their work and effort for the means of subsistence.

Having enough money allows you to break those chains and be the complete owner of your time and your actions. Something that, until not many years ago, was exclusive only to kings and feudal lords.

On the other hand, money -taken to the other extreme- can also enslave you by itself, without the need for any external agent. It clearly has an addictive nature and wanting to accumulate it can even lead you to lose yourself on the quest.

I find it fascinating, for example, how a monarch of a first world country, who has more wealth, power, and connections than the majority of the population, can throw it all away to accumulate a little more money.

However, what exactly is money? Does it amount to something?

You use it every day, but have you ever wondered where it comes from or who runs it? Or if it can be created from scratch? Or why are there different types of currencies today?

And most importantly ... is it any use to know all this or is it simple historical curiosity?

I believed that it was simple curiosity and that it would not help me much to know how it worked, other than to fill my head with data. Knowing for the sake of knowledge has never interested me: I like it better when knowledge can be put into practice to improve my day to day life.

Until, some time ago, I started getting hooked on and reading articles and books about money that answered the questions mentioned above.

And what I discovered was spectacular.

Not only did this new knowledge that I was acquiring directly affect me, but it could become a fundamental part of my life. An essential piece of that freedom of which I spoke before.

So I'm going to try to summarize some of these ideas below.

Money at its core is basically time.

It is concentrated human time, transferred to coins or electronic numbers.

A €50 bill, for example, can represent a working day of your life, the 8 hours you have been working during that rainy Friday in mid-September.

You went to the office, you did your things and when you were leaving they gave you that bill in exchange for the hours you spent in there. So now you have 8 hours in your pocket that later can be exchanged for hours (services) of other people.

Imagine that, on your way home, there's a bookstore and with that bill, you buy two books for €19. You have just exchanged 3 of the hours that you carry for the hours of many other people: those of the writers who wrote the books, those of the people who work at the publishing house that published them, those of the people who work at the paper factory, the covers designer, and the bookseller who just sold them to you.

It's wonderful, you've traded your individual time for other people's time that you don't even know in an extremely easy way!

So far so good, we already know at least what money equals: worktime.

We have developed a method to "bottle" our time and move it into the future. Amazing.

Everything would be great at this point if your 8 hours bottled today could be stored and did not lose their value, that is, if you left those €50 in a drawer and recovered them in 20 years, they would still be those exact 8 hours.

For this, the human being has always tried to find the best material that serves as money. Like all other inventions, this one has evolved and improved as the years and centuries have passed.

Throughout history, all kinds of objects have been used as money: shells, seeds, salt, teeth, cigarettes, bronze, silver, gold, ornamented papers ...

What is the problem with using, for example, seashells as money? Why don't we keep using them?

Well, basically if someone managed to get a lot of those shells by going to the beach and catching them, they could easily dominate the economy, "skipping" that premise of getting money from work and gaining power over everyone else's time. That is, they are not so rare that they can be used as money today.

Then there is the issue of being able to carry many around easily. Or that if you keep them for a few years, they might start to break down and decompose.

Therefore, we searched for something that was extremely rare, that could be easily transported, that was durable, divisible, and unanimously accepted.

Metals provided several of these characteristics, but one did it better than the others: gold. Thousands of years of history and evolution made him the clear winner of the contest, thanks above all to the fact that it does not decompose and that it is very difficult to find and, therefore, scarce (Have you ever wondered why the winner of any competition is given a gold medal?).

OK perfect. And then what happened? Why don't we use gold?

Bottom line: sometime in the 7th century, somewhere in China, it occurred to someone that a nice, signed piece of paper could be proof that that person owed them something. Those papers in themselves were worth nothing, but they were a promise of the issuer, always interchangeable for another valuable object, such as species.

Usually, the issuance of these papers was often of limited duration, and at some discount to the amount promised later.

Since then things have evolved.

Later, another group of people thought that, instead of carrying gold, these same papers could constitute proof that the person who had them possessed that gold. A good exercise in imagination.

That is, for example, an ounce of gold (31 grams) was worth the same in its day as 35 papers of the United States government. And the price did not change. This made that paper, called a dollar, always worth the same and not lose its saved hours of value, thanks to the fact that it was not actually just paper, but gold.

And that's why they called it "the gold standard."

Until one fine day in 1971, that conversion was canceled. The government said enough. The end of the gold standard. Suddenly, these papers no longer had an equivalent value in gold, but had a life of their own: simply the value that the group of people who used them believed.

What is the problem, then?

Basically, the paper, although it is a beautiful and signed paper, does not have the properties that we mentioned earlier that money must have to be money:

"... something was sought that was extremely rare, that could be easily transported, that was durable, divisible and unanimously accepted ..."

Banknotes can be divisible, transportable, accepted unanimously ... but they are not durable or of course scarce, the most important property of all, if we had to choose any of them.

Why are they not scarce? Are they not made in such a way that it is very difficult to copy them?

Because the central bank that issues them can print more whenever it wants.

In fact, nowadays it is not even necessary to turn on the printer: the amount is written into a computer of that central bank and voilà, money created! Which is then distributed to the other banks?

In other words, scarcity, the basic and essential characteristic of any money, is completely cancelled.

So this is what has happened over the last few years:

In other words, according to the graph, $100 from 1913 today equals to... $3.87.

Therefore they have lost 96% of their initial value. Those hours of work saved in the hundred-dollar bill of the last century have gradually evaporated, until they are worth only a few minutes today.

How can this be? What's happened here?

Surely you have ever heard the word inflation.

It is often said that inflation occurs when the prices of goods rise (and you have surely noticed it in how the public transport of your city becomes more expensive, year after year) but in reality, it is the opposite: it's not that prices are rising, but the money itself is losing its value.

I keep simplifying a lot, but why does money lose its value as time goes by?

The loss of its value is not an intrinsic characteristic of money, but only of the specific money, we use today: dollars, euros, yen, pounds, and others.

But it doesn't have to be that way.

The money we use today loses its value because more money enters the system. Less scarcity equals less value.

Scarcity, as we have seen with gold, is essential for money to be considered as such. If something is abundant, it cannot be used as money.

And why is the new money coming into the system? Why do central banks "print" money from time to time?

Basically, because they believe that in this way they can artificially control the direction of a country or region, avoiding, for example, the catastrophic consequences of the economic crises that they themselves have promoted.

This is how the 2008 one has been dodged and how they try to get around the Coronavirus one:

This graph shows us the total money in the United States economy. As we can see, from 2008 there were suddenly many more dollars in circulation, introduced through the central bank to try to alleviate the crisis, without much success. And we can also see a last spectacular rise this year 2020.

What does this all mean?

The moment an individual or institution has the power to create money out of thin air, that institution also gains power over the time of all the other members of that society.

Taken to the extreme, this power, this indiscriminate printing of money, leads to so-called hyperinflation. It seems then that the prices of goods are beginning to rise wildly, but in reality, as we have seen, it is not that, but that money itself is dramatically losing its value.

If we stop for a moment and go to Wikipedia:

"As the first user of the fiat currency, China was also the first country to experience hyperinflation. Paper money was introduced during the Tang Dynasty, and it was generally well-received. It held its value, as successive Chinese governments established strict controls on issuance. It was only when discipline on the quantity supplied was broken that hyperinflation emerged. The Yuan dynasty (1271–1368) was the first to print large amounts of fiat money to finance its wars, resulting in hyperinflation. "

There is so much money in circulation that money itself is no longer worth anything.

Which can lead to surreal situations like this one we see in the image. Those were the number of bills that were needed in 2018 in Venezuela to buy a roll of toilet paper: 2,600,000 bolivars ($0.40).

However, hyperinflation is the last thing to happen before an economy completely wrecks.

If we don't take it to the extreme, what happens first is what we experience year after year: sustained inflation (in addition to constant cycles that end with economic crises). Your saved hours are losing value little by little. A silent robbery by the government, expropriating your money without you even knowing it.

We could almost say that it is the perfect robbery.

But deep down, it means that the dollars or euros you are using have no value. They are worth what the paper they are made of and no more.

We see a glimpse of it in that, the same central banks that create money out of nothing, do not really use that money to settle their accounts among themselves. They use… gold!

Of course! These institutions know that their own money is an illusion, a house of cards, so they use what real money is: the precious metal.

Here you can see for example how much gold moved between central banks this year.

The obscurantism with which the economy has been covered over this last century, filling it with strange concepts, unproven theories that are taken as true and continuous regulations or deregulations, had made it a totally cryptic issue for the majority of people.

Hardly anyone knows how the economy really works. And this is great for those running their course today.

We have been tricked our entire lives into believing that the money we use is money, but it's not.

The illusion at the moment is still holding, but we don't know for how long The point is that governments, until now, have been able to compel the use of their money by force, disguised as legality and taxes.

Do you think that, for example, Venezuelans want to continue using their currency, which is currently worthless? Why don't they use another stronger currency or a cryptocurrency?

Because their government doesn't allow it.

Governments have the monopoly of money, which provides them with the monopoly of force, which sustains the monopoly of money, in a vicious circle.

Having known all this, what can I do as an individual?

On a practical level, you can invest in gold or other assets that, instead of depreciating like money, maintain or increase in value.

(Remember that the fact that your investment goes up in price is sometimes not so much a consequence of its demand, but of the depreciation of the same money with which it is compared!)

The problem with this is that the government still has the power to regulate and control these markets, enacting laws that make gold holding illegal, for example.

On the other hand, investing in other physical assets can have positive consequences for you, but negative for the rest of society in a collateral way. For example, with so many people investing in real estate (to safeguard their savings that would otherwise be affected by inflation), its price continues to rise, preventing a whole subsequent generation from accessing their own home.

Then what?

Well, since a few years ago, you can also start moving part of your wealth to a new form of money that meets all the requirements that money should have better even than gold. It is called Bitcoin.

Earlier we commented that one of the fundamental requirements of something to be considered money it's scarcity. Well, Bitcoin is the only known "thing" in the universe of which the entirety of its offer is known.

We don't know how much gold there is and will be in the world, an estimate can be made but it is not a fixed unit. Of course, we don't know how many dollars there are and there will be, as far as the central bank feels like it, new ones are created ... But we know how many Bitcoins there are and there will be. In fact, it has been known from the first day of its creation.

And, on the other hand, unlike gold, the government can declare its use and possession illegal, but they cannot enforce that law, since it is ultimately possible to keep Bitcoins in your mind, remembering a passphrase.

But we have not come this far for me to convince you to exchange your dollars for Bitcoin, far from it. Because otherwise, I would have to write another article as long as this one.

We've come this far to start asking ourselves on a regular basis what money is, why it exists, and whether or not what you're using is money.

We can begin to doubt everything, as far as the economy is concerned. And also to start seeing the money we have in the bank for what it is: a collective illusion that lately is juggling on the edge of a cliff.