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Imaginary ‘money’ leads to Imaginary ‘values’ and ‘prices’!

July 16, 2012

The goal and purpose of ‘money’ is to measure VALUE!

When our money unit was established in 1792, the basic unit was called the ‘dollar’. This name (dollar) was then defined as 371.25 grains of pure silver. Why was it important that the ‘name’ dollar be defined in terms of some ‘thing’ (say silver)? I would suggest that this gave our basic monetary unit a perceived ‘value’. We could then mint coins containing the precise amount of silver so that our money unit could fulfill its function. What is the function of a money unit? I would suggest that the function is to ‘measure’ (as best as possible) the ‘value’ of other goods and services in our economy. With an objectively defined money unit we could ‘value’ all other goods being exchanged with a conviction that ‘value’ was given for ‘value’.

The most important concept in economics and monetary theory is this concept called ‘value’. As we create new wealth we desire to exchange this wealth for alternative wealth (material goods mostly). Our mindset in any exchange is to give ‘value’ for ‘value’. If I produce bushels of wheat and you produce milk, we may desire to exchange our products in the marketplace. To facilitate exchange and make it easy to transact business we invent a ‘money unit’ that we can use as a proxy for ‘value’. This means that I can sell you my wheat and I can purchase your milk without using barter to facilitate the transaction. Money becomes the medium of exchange to facilitate the transaction of ‘value’. Prices then emerge in the marketplace from all the new transactions and exchanges that are negotiated between buyers and sellers. If the money unit is a thing of ‘value’, then ‘prices’ tend to be stable and relatively objective over time. In other words, ‘money’ is a measure of ‘value’ if the money unit is perceived as a thing of ‘value’ (like silver, gold, copper, etc.).

The ‘market value’ of a typical house is derived using money units which are perceived as having ‘value. The ‘price’ derived is then viewed as an objective measure of value. Keep in mind that there is no problem with using paper money to transact exchanges in the marketplace to facilitate trade. The key, however, is that the paper units be viewed as equivalent to the money unit that was originally DEFINED (the original dollar). Historically, most traders and investors demanded that paper units be ‘convertible’ (if the holder desired) into a precious metal based on some established rule (say $35 paper dollars for 1 ounce of gold). Why is this necessary? The primary reason is to maintain confidence and trust in the paper unit and also to maintain stability in the price structure within the marketplace. Paper units with no convertibility leads to ‘inflation’, ‘banker manipulation’, and ‘volatility’ within the PRICES (of goods and services). This then leads to a collapse of the money unit over time.

Money and Confidence…in the money unit…is key to a viable system of Capitalism. The United States of America has functioned with a relatively sound monetary policy for most of its 236 year history. Our money unit (the dollar) has been mostly tied to some physical commodity (like a precious metal). Then in 1971, our dollar was changed to merely a number on paper. This evolved into merely an index number in 1973. Then in the 1990’s our dollar evolved into merely a virtual unit as the computer became popular and omnipresent.
 Today, we try to measure ‘value’ in the marketplace with a money unit that has ‘no value’. In fact, our money unit today is mostly virtual (imaginary) and lacking in any physical substance. This creates a marketplace (now a global marketplace) where ‘prices’ and ‘values’ are distorted, volatile, and subjective. Central Banks now create new units via their computers and distribute these digital units to select financial organizations to manipulate ‘prices’ of most assets for mostly political purposes…including the desire to avoid a collapse of the System. Is this Capitalism? Can this type of operation last for the longer term? You know my sentiment!
Finally, we now have a global network of ‘high frequency computers’ which allow traders, investors, and bankers to speculate and distort most ‘prices’ and ‘values’ in the marketplace. All this speculation and manipulation leads to a loss of confidence in the System and eventually to a total collapse of the System. The global crash of 2008 has become the harbinger of new uncertainties and distortions for all the markets going forward. The problems of the Keynesian/Samuelson econometric models are now surfacing and becoming the source of what is emerging (a total collapse of the international financial system). The need for a NEW SYSTEM will became obvious as more people become aware of these issues. Imaginary MONEY leads to Imaginary PRICES and VALUES!
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