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Some First Principles – essential for understanding money

November 3, 2012

The basic principles which underlie any money system reveal the realities that we need to understand today!

When teaching about ‘money’ and our history of Capitalism, there are core principles that do not change over time. Realities do not change but people can choose to live with illusions as their reality if they desire. These ‘illusions’ work for a short time period but then the fundamental realities emerge to squash the illusion. Today, we live with an ‘illusion’ of objectivity within our economic system as mathematical numbers give us this illusion of objectivity. In reality, however, mathematical numbers are subjective phenomena and these ‘numbers’ can be manipulated and massaged to create deception and gimmickry. Let’s review some of the basic realities of money that do not change over time.

1. What is ‘money’ in reality?  This question is fundamental to understanding money and its role in the marketplace. We need to understand that ‘money’ is invented by man and is not some item that is universal within nature or our physical universe. Money starts out as an ‘idea’ of one’s mind or consciousness. This ‘idea’ then becomes a spoken word (i.e., money) to designate or refer to some thing which traders desire and which is perceived as having ‘value’. Money (the designated item chosen) then emerges as a proxy for the valuation of goods in the marketplace. In past missives we have covered all the different items which traders have chosen for ‘money’. Items like: sheep, camels, deerskins, beaver skins, wampum, tobacco, copper, silver, gold, etc.

2. What is the purpose of money?  The basic role for money is to serve as a ‘standard of value’. The concept of a ‘standard’ emerged from a barter economy where goods are exchanged from trader to trader. Trade is much more viable and efficient with an acceptable ‘standard’ for value. Value in exchange is why we desire some acceptable measuring rod (a reference item) that everyone can agree upon (within a given marketplace). The best ‘standard’ throughout history has been silver (gold was usually more desired as a metal but less desired as the ‘standard’ of value).

3. How did the calculation of ‘value’ emerge?  The logic of calculating ‘value’ is best done with mathematical numbers. This is why currency units emerged. Our ‘dollar’ is a currency unit as well as a ‘name’. We can also represent the concept of a ‘dollar’ with a symbol and number:  $1.00. If we then define this currency unit (name, symbol, and number) in terms of some ‘standard’ (say units of silver), we can then ‘calculate’ value with logic that appears objective. Since ‘silver’ is an item from nature that most people perceive as having ‘value’ we can then define our currency unit (say dollar) as a specific number of grains of silver. This definition process gives the calculation of ‘value’ some objectivity as traders exchange their goods for this currency unit. Note that trading and exchange is based on an exchange of ‘value’ and for ‘value’.

So let’s think about the above evolution of money. Money, in reality, does not exist within spacetime nor is there any universal item within nature that is ‘money’. Rather, money emerges from the mind of man. The ‘idea’ called money is really a subjective unit of our consciousness. We then speak this word as we find some item of value that everyone desires as a substitute or standard of value. Since we desire to improve the objectivity of value calculation, we develop a currency unit. This currency unit solves the logic of calculation of value. We can now ‘value’ all goods within a marketplace via this currency unit (say $1.00). In time ‘prices’ emerge for all goods…as exchanges and trading continues in a marketplace.

4. What happens when a currency unit is separated from some underlying item that was used as our definition of value? What happens is that our currency unit initially becomes a paper note (as our dollar did in 1934). This paper note is perceived as being mostly valueless by the marketplace. The paper note works, however, to ‘price’ other goods and services for a time period. And if a government forces or mandates this note as legal tender (for all goods public and private), then everyone must use it to ‘price’ exchanges and trades. The logic of a ‘standard’ of value becomes less relevant and new subjectivity is introduced into the marketplace. Prices become more volatile and unstable with fiat paper notes…which can be created in unlimited amounts.

As the paper note is later completely divorced from any physical commodity…as was done in 1971 with the closing of the gold window…prices become even more subjective and volatile. Then when the paper note is abandoned for the logic and efficiency of computer digits, prices become even more subjective and volatile (1980’s to 2012). Today, our currency units are mostly ‘digits’ within our computer screen. These digits are traded with high-speed computers at near the speed of light. All this trading is now done mostly in real-time…and the ‘click’ of a computer mouse executes the trade. This new logic and efficiency creates ‘prices’ for our goods and services, but it also creates extreme volatility and subjectivity within the trading process.

What we now experience within our financial markets are currency units which are created ‘out of nothing’ by our Central Banks and then typed into a high-speed computer for distribution to select entities. This entire operation is extremely subjective and also subject to easy manipulation by authorities and hedge funds with their HFT (high frequency trading) activities. What we now experience for ‘money’ are imaginary (virtual) units emerging from the consciousness of key policymakers (such as Bernanke in the USA). Money units are now really ‘units of consciousness’ which then get typed into a virtual machine for distribution. Central planners then manipulate the markets to accomplish their policy goals.

We no longer have a ‘standard’ of value for our currency unit (the dollar) and valuation has become totally subjective and short-term. Prices are now denominated in a currency unit which has NO stability and no substance. Our ‘dollar’ is now a ‘mental abstraction’…also called a unit of consciousness! We now have Central Bankers ‘counterfeiting’ these virtual units via polices called QE to further manipulate and distort all ‘prices’ within our global marketplace. What has emerged over the years (mostly since the closing of the gold window in 1971) is a centrally controlled currency operation which is mostly fraudulent, unconstitutional, and subjective. This operation produces mal-investments, distortions in value and prices, and extreme volatility and instability within all markets. Eventually, this operation will lead to a complete collapse of the entire global financial system.

What we now need to recognize is that there is NO Solution to our current non-system and the excessive DEBT which has been accumulated. The system is totally bankrupt and dysfunctional as a viable trading operation. The historical system of free trade and decentralized markets (Classical Capitalism) has been replaced with a CENTRAL planning operation that can do nothing more than manipulate, rig, and distort the trading markets. We now need a NEW SYSTEM for our growing global economy of some 7 billion people. The transition to this NEW SYSTEM will be difficult and will take time…as a collapse of our existing system is required. Those who are aware of all these factors, however, can provide a positive framework of education during this transition. Education of the masses is what is now needed. Pass the word on! I AM:

 The Future is Now!
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