Money is something everyone has heard of and wants. It is the life blood that drives an economy. Money is used in everyday living to buy products, pay bills and so on and everyone tries to obtain more of it. It is used to buy our wants and needs and has come in many forms throughout history such as coins, notes and strange objects. But, what is money? Money has many different names such as cash, bucks, dough and currency. Money is also often said to corrupt, but it is needed for an economy to prosper.
The
Hidden Secrets of Money
There are many secrets about our
current monetary system that are keep secret. Mike Maloney is an economist that
calls these secrets the “Hidden Secrets of Money”. “The hidden secrets of
money, some of them are hidden in plane sight. They are like right in front of
you. The way our monetary system works is actually something that isn't hidden
away from all of us. It's out in the open, but it's complex and just don't,
they can't see how it works. It's hard for them to imagine that we're living in
such a hoax. Others are meant to be secret, but the truth is slowly coming out.”1
Maloney discusses here how the secrets are kept secret either by keeping
them hidden or by making economics seem complex, but if you break economics
down and make it simple then it's easier to understand then you can imagine.
Revealing
the Secrets
As these secrets get revealed
throughout this book, you will get to better understand how our current monetary
system works. Knowing this stuff can really benefit your financial position as
you can make better financial decisions. People can earn money in booms and
recessions. Mike Maloney does a very good job at explaining these secrets in
his Hidden Secrets of Money Series and it is also advised that you should watch
the videos from this series.
Defining
Economics
Investopedia defines economics as “A
social science that studies how individuals, governments, firms and nations
make choices on allocating scarce resources to satisfy their unlimited wants.
Economics can generally be broken down into: macroeconomics, which concentrates
on the behavior of the aggregate economy; and microeconomics, which focuses on
individual consumers. Complex right?
The following bullet points are a
way to simplify the definition of “economics”:
• Economics deals with the
distribution of limited resources to satisfy the unlimited needs and wants of consumers.
• Economics
centres around the concept of demand and supply.
• Macroeconomics is the economy as a
whole and microeconomics is looking at the individual transactions with the
economy.
• Money is the life blood of the
economy and flows between different sectors of the economy.
• The Monetary system deals with how
money is provided, the management of money and what form of money is used such
as a fiat currency monetary system uses money backed by confidence.
• Money
and other assets rise and decline in value.
• The
issuers of money use their power to benefit themselves at the expense of
others.
• Governments
today can create money from nothing.
What
is Money?
The Collins dictionary defines money
as the following: “Money is the coins or banknotes that you use to buy
something”, but this definition isn't very accurate. The true definition of
money is much more then just banknotes and coins. Money has come in many
different forms throughout history. Money first came in forms such as stone
money or objects, then as random sizes of gold, silver and copper and then gold
and silver coins. After coins, money turned into paper notes and now it's
digital. The diagram below shows the transformation of money.
However, each of these
representations of money have different qualities and the problem is that not
all of these qualify as money. The gold and silver coins are money, while the
rest aren't and they are instead called currency. Money is used to store
economic energy. The economic energy is the time and freedom one has. In the
next few sections of this chapter, we will first look at the difference between
money and currency and then the development of money from bartering.
Economic
Energy
Economic energy is the time and
freedom a person has. A person's economic energy can be seen as the work you
can do within an amount of time and you are given money to store that value.
The money is used to store the economic energy to be able to use it in the
future. However, currency loses the amount of economic energy it has and allows
the issuers of currency to take away your economic energy.
Money vs Currency
The difference between money and
currency is explained in Mike Maloney's Money vs Currency episode in his
Hidden Secrets of Money series. The characteristics of money are as follows:
• A
medium of exchange: This is something that can be used to buy goods and
services.
• A
unit of account: A base value of each unit, such as an ounce of gold all
around the world that has the same price.
• Durable:
The ability to last a long time period.
• Portable:
Able to be moved around easily.
• Fungible:
Each unit of an item is the same as the next, which means they are
interchangeable.
Mike Maloney explains fungible by
saying, “A Dollar in your pocket buys the same amount as a Dollar in my
pocket.
• Divisible:
The ability to be divided.
• Store
of value: The ability to store value.
Money has all these characteristics,
while currency has all of these characteristics, except that it isn't a
store of value. The reason why
currency lacks this ability is explained below.
Money
and Currency
Many people, even bankers, don't
know the difference between money and currency and this lack of knowledge is
one of the reasons why our economy is in a mess, because we use currency. If we
used money then this wouldn't happen. Money and currency are a medium of
exchange, unit of account, durable, divisible, portable and fungible, but only
money is a store of value. A currency like the German Marks from the Weimar
Republic is as useless as paper, while money like a gold coin from ancient
Greece still has its original value or even more. Currency can't store value,
money can and this is because money is backed by its intrinsic value.
Intrinsic
Value
The intrinsic value of an item is
its natural value, the value of the materials it's made from. Money is backed
by this value and so is very stable. Currencies however are backed by trust,
which is a fiat value that can easily vanish. The intrinsic value of today's
currencies is next to nothing as they are made from materials like paper and
nickel. Even worse a fiat currency on computers have absolutely no intrinsic value.
Gold and silver coins can have a fiat value on it such as a perineum value, but
when that fails, the
coin
still has its intrinsic value to fall back on.
Purchasing
Power
The purchasing power of money and
currency is how much it can buy. For example, if an item cost $20 US Dollars
and $35 Australian Dollars, the US Dollar then has more purchasing power as it
can buy more then an Australian Dollar. Gold and silver are both suitable as
legal tender as they don't lose their purchasing power due to inflation like
paper notes and cheap metal coins do. Something retains its value by being
scarce like gold, which is valuable because it's rare and that value would be
lost if gold become more common. This is why money and currency lose their
purchasing power when the amount of it increases. Gold and silver have to be
mined out of the ground, while paper money can just be printed with any
dominations of numbers on each note.
Why
is this Important?
Our use of currency resulted in
placing our economy into the current mess we observe and if we had used money instead,
we wouldn't be in this mess. The expansion of the currency supply is stealing
your purchasing power and giving it to the rich and so you need to get your
wealth into real assets to protect yourself from this scam.
“In the absence of the gold
standard, there is no way to protect savings from confiscation through inflation.
There is no safe store of value.”
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