“…the oldest and simplest reason of bankruptcy in finance: lending money to people who can’t pay it back.”
One cannot take these graphs at face value, for example, the long $ decline from 1933 to the present has also been the Pax Americana where the US has dominated geopolitics. Also, the Roman denarius was a commodity based currency, while the US$ is a fiat currency backed by US government taxing power over US assets.
But the larger issue of the costs of empire over time are instructive. One should dig deeper in analysis, but not be too complacent. Especially in light of the currency manipulations of the current age.
Yes, but no. The actual truism should be stated as: “Money is Time.” The difference, of course, is that time, not money, is the ultimate value. (The truism is probably most often stated in reverse because most people are confused as to the ultimate value of life, and thus respond better to the admonition that they are wasting money, not just time.)
Time is egalitarian. It is the great equalizer because in the course of a lifetime, an hour of time is equivalent to a rich or poor person alike, or a powerful or powerless person. Not equivalent as measured in terms of the currency of money, but equivalent as measured in time value.
“Money is Time” is also probably the most profound statement one can make in economics, because, in theory, economics uses money as the true measure of the value of time.
Think about this a little more deeply. What explains the differences in value between a horse, a car and an airplane? The difference in monetary value is explained by the efficiencies gained by a car over a horse, and an airplane over both. A horse can get one rider from Los Angeles to New York in probably about 2-3 months. A car can get maybe five or six people from LA to NY in about 3 days. An airplane can get 300+ people across the continent in about five and a half hours. If we compute and compare the three options in terms of man-hours expended, we can see why airplanes are valued that much more than a horse.
One could see this just as simply by comparing the productivity (in terms of time) of a tractor vs. a plow horse, or a computer vs. a typewriter, or a smart phone vs. a telegram. Technologies that allow us to make the most of our time are valued accordingly and displace less efficient technologies. And the time we gain is measured in monetary wealth.
This truism, that Money is Time, also has profound implications for how we control money as a measure of time. Money has been defined by its three functions: a unit of account, a store of value, and a medium of exchange. What money really does is tell us how much time value we have produced, saved, and stored up for future consumption. As such, money is merely an information signal that tells us if we are on the right track or not. If we are on the wrong track, being unproductive and wasteful, ultimately we have squandered time, not money.
I recently read a monograph by George Gilder, The New Information Theory of Money, that explores this relationship between time and money in depth. He observes that Neanderthal Man had the same natural resources that we have today, since all matter is conserved. Homo sapiens today is much wealthier because we live longer, we spend less time working for food and shelter, and have much more opportunity for leisure and cultural pursuits. Our wealth is really a measure of how productive we have become with our time.
Gilder’s monograph analyzes what this means for our concepts of money. When we think of money as wealth, we come up with all sorts of schemes to increase the supply of money in order to increase wealth. When we consider the actions of the central banks for the past hundred years, we can see that this fallacy defines our misguided policies. This should be clear from the actions of the US Federal Reserve since the 2008 financial crisis, both leading up to that crisis and in reaction. Fed policy, referred to as Zero Interest Rate Policy and Quantitative Easing, has merely goosed the nominal prices of assets such as houses, collectibles, land, stocks, and bonds with the idea that more nominal wealth as measured in US$ will lead to greater productivity and real wealth as measured by the value of time.
It hasn’t quite worked that way. Why? Because the Fed is focused on managing inaccurate statistical measures of real wealth as denoted by GDP, money incomes, CPI price changes, etc. Policymakers focus on the monetary economy rather than the real economy because that’s what is measured by their statistical information. Perhaps it is the best proxy we have, but it is still a proxy.
You must ask yourself – are you richer in terms of time? More time for you and your family to spend as you see fit? Those few beneficiaries (the 1%) who have benefited directly from this misguided monetary policy can certainly answer yes, but for the aggregate body politic, the answer is no.
Money supply today is controlled by governments with their ability to expand and contract credit through the banking system. Thus, our monetary economies really operate according to the calculus of political power and influence. It is no accident that ZIRP taxes small savers in order to recapitalize large banks that made the bad loans that crashed the financial system. No wonder the majority of voters are disgruntled with the results.
Gilder explains the true value of money (as opposed to wealth), is as an information signal that helps us be efficient and productive with our time. When we distort this information source (which is exactly what the Federal Reserve does when it manipulates interest rates), we can only become less efficient and productive. He notes that gold was a more accurate basis for money information because its value was a direct function of the time and effort it took to get it out of the ground. Governments or private actors could not easily manipulate its value.
He applies this reasoning to an even better foundation for money, Bitcoin. Bitcoin is a digital currency that is “mined” by the application of mathematical algorithms that get more and more difficult to solve as time goes by. This means that in order for the supply of bitcoins to increase, we must become more and more efficient in terms of computing power. In other words, becoming more productive with time. You see, the more productive we are with time, the greater the wealth the monetary information signal should represent.
Currently, governments have little constraint over how much money they can create, meaning there is little hard discipline being imposed on political power. This can only be a dangerous state of affairs, as we know that power corrupts and absolute power corrupts absolutely. As I mentioned in a previous post, floating fiat currencies were intended (ala Milton Friedman’s monetarism) to discipline politics, but have failed miserably to do so. In fact, they have achieved the opposite, creating more volatility and chaos in the global economy.
But, with digital currencies, power, influence, and wealth have little or no sway over the supply of money, which means they cannot manipulate the value to suit their narrow interests. Of course, those who hold political or economic power are loathe to surrender it, so we can expect powerful forces to be opposed to taking control over the money supply away from them. But a money that is directly connected to the value of time must be the most efficient and productive information signal that will increase the value of wealth measured in time, while insuring both liberty and justice for all. Remember, time is the great equalizer.
Digital currencies today are not yet developed to the point of replacing fiat currencies, but if this discussion captures your interest I would recommend reading up on technologies such as bitcoin. Much of the literature focuses on the efficiency of a digital payment system, but the real payoff in throwing off the yoke of fiat currencies will be in terms of liberty, justice, and true egalitarian democracy.
For any of you who are too busy trying to make it to notice, we have a world-wide problem with government-issued (fiat) money. This article offers an interesting new conceptualization of virtual currencies that might weaken governments and strengthen individual freedoms world-wide. That should get the statists all in a tizzy.
From the WSJ:
Free-Market Money, Courtesy of the Web
Bitcoin was just the start for virtual currencies. Cloud-computing certificates, anyone?
The digital currency called Bitcoin may or may not survive long-term, but it has already succeeded on one front: making people think seriously about alternative forms of money. More such alternatives to traditional currency will likely emerge.
The attraction of the Bitcoin is not just the anonymity it provides to users (an anonymity that the U.S. government has alleged some users have employed for money laundering). Bitcoin is also secure against traditional forms of counterfeiting. More important, the Bitcoin is designed to be scarce and thus immune to inflation. There is a limit to the number of Bitcoins—21 million—that is determined by a transparent rule and not by the whim of a central banker.
Gold used to serve this purpose. It was a commodity that was relatively scarce and not easily mined, thus reducing the risk of inflation. That valuable function has been superseded by today’s paper moneys. In this sense, Bitcoin is an electronic version of gold.
In the future, it is likely that other digital alternatives to currency will emerge, each one competing in the market to satisfy the needs of users. The possibilities are limited only by the imagination. Here is one:
Cloud-computing companies could issue certificates convertible into an hour of premium computing. Prices for other services could be quoted in terms of these certificates. The analogy is to traditional gold-backed currency, which was redeemable into physical gold at the option of the owner. While the dollar price of an hour of premium computing would vary with market conditions, the certificate would be guaranteed to always convert into one hour of premium computing. The maxim “time is money” would take on a new meaning.
Computing has become a fundamental element of virtually every technology, a common currency, so to speak, of doing business in today’s economy. Cloud-computing companies provide on-demand storage and computing at a price that varies with market conditions and the computing speed required. They compete on price and the quality and reliability of their cloud, which can be accessed from anywhere in the world at any time. Competition forces the companies to continually upgrade to the latest generation of computers and data-storage facilities.
Cloud-computing certificates could be redeemed at any time. The owner of a one-hour certificate, for example, could convert the certificate today or wait 18 months when presumably an hour of computing time would be able to do twice as much because of the increased computing speed that comes from Moore’s Law.
The certificates would never expire, so the owner need never convert them. Unlike gift certificates, they would not be fixed in price to a certain dollar value but to a fixed amount of computing time. If the public gained confidence that the cloud-computing companies were not flooding the market with certificates, the certificates might be viewed as stable and liquid enough to circulate as money. If the certificates were freely transferrable, they could come to be used to buy any product or service, or be saved as a stable store of value.
As confidence and familiarity in the certificates grew, the certificates could even be used as a basis for credit or any other thing that dollars are used for. Certificates would have an advantage over Federal Reserve-produced dollars as their supply and price would be completely dictated by the market.
During slow economic times, cloud-computing companies would have less incentive to expand their clouds and would reduce the number of certificates they issued. The reverse would happen in better economic times. The certificates would have an advantage over the Bitcoin: They could be converted into something of value, instead of just being based on relative scarcity.
It is impossible to predict what kinds of money a truly free market will create in an increasingly digitized world. But we can be confident in predicting that just as markets improve the quality of all products, they will do the same for money.