Creating money

Creating money

The dependable grifter could live a fine life, paying his way by printing endless promissory notes. Some to exchange for food for his family. Yet more to pay labourers to build him a home. Not satisfied with that, he could get a very large printing press that can make sufficient notes to be handed over in exchange for a medium sized aeroplane. If someone fails to repay a loan, he simply deletes the entry from the ledger and prints some more promissory notes. The agreement to pay a premium on gold and silver stored with him is honoured, with newly printed promissory notes. Upon doing so the price of bananas go up as does the price of tools and fence posts.

Governments have often printed money, created money electronically, and seen the price of all goods and services rise to compensate. There is no free lunch. At first the economy booms as more money is available, but it then runs into trouble. There is no free lunch. Upon seeing the price of bananas rise alarmingly, those with silver stored with the dependable grifter will request their silver back. There will be a run on the bank. Protests start. The poor get hammered the most. The price of assets rise. The rich own the most assets. The rich do well. The poor get hammered. Their wages fall. The number of bananas that they could buy per day of work goes down. House prices rise. The price of land goes up. The rich own land and property. Their wealth increases in monetary terms.

The dependable grifter is not the only dependable grifter in town. There are others doing the same thing. They compete with each other. One bank offers eleven pieces of silver interest each year on a hundred pieces of silver stored. That compares favourably with those offering ten. Rather than charging twenty pieces of silver interest on loans, some offer the same service for eighteen. When a bank lends all the money they have, they bring their rate back in line with all the other banks. Bankers can use interest rates as a way to attract deposits or increase lending according to how much they have on loan or on deposit.

A buyer and seller may use the same bank. An item can change hands, and the payment takes the form of the bank ledger showing a different person being entitled to the silver. If the buyer and seller use different banks, a transfer between banks takes place. One bank may request the transfer be made in silver or a note is made of who owes what to who. Trust is vital. Dependability is vital. Confidence in the other bank is vital. If there is a suspicion that a bank is printing too many notes over and above the number of silver tokens in their possession, that faith can be tested. If the tally of who owes what to who is backed by dependable customers taking out loans, then things will be fine. If there is fear of customers defaulting, banks will insist on silver transfers rather than promises. Money is trust and confidence.

As more gold is dug from the earth, more money can be created in lieu of it, but a bank can create money at any time, usually by lending. However, the lending must have a security tied to it - a credible, quality asset. If one fails to repay the loan, the bank takes possession of the asset. Deciding what is credible and what is quality is open to interpretation. A newly built house, where demand for houses is strong would be labelled a quality asset. A business with strong prospects can be viewed as an equally valid quality asset. The criterium for what counts as quality and credible is based on historical performance. No bank will create money ad infinitum and stay in business. Gold is unearthed, houses are built from scratch, business come into being. This is money creation. Once those assets enter existence, money can be created to match this new wealth.

Systems emerge where promissory notes have no association with gold and silver. Some are government-controlled others are free market. Free market promissory notes represent something abstract beyond reason. The trust is entirely based on the name, how widely that name is known, and who supports the name. A system that is not associated with credible, quality assets, relies on wagers endlessly fed into it. A hierarchy forms. Those at the top of the hierarchy are those that wagered early. Those cashing out profitably rely on others taking losses. The fools join in too late, the clever ones join early, but the cleverest of all are those that create the system. They gain from free wagers that are built into the system at the start. Some hierarchies promise you a place on a list. As more join, the list grows, and you eventually reach a point where some are paid handsomely for their gamble. Some will win the bet, most will not. No wealth is being created. There is no economic value added. There is not much genuine market value added. Any gains are at the expense of others that lose. There will be a free lunch for the lucky few. The rest have hope, but that fades.

The majority of all wealth is held in the form of property, infrastructure, data, commodities and a slew of other tangible assets. Only a little of the wealth upon the globe is held in the form of promissory notes, whether that takes the form of electronic data entries in a ledger or in printed physical form. Wealth is assets, promissory notes are the tool used to transfer and trade assets. The quoted price of an asset indicates the price at which the last trade took place. It does not indicate how much you are guaranteed to get for your asset. It may be a lot higher or a lot lower depending on the size of the asset sale and who is prepared to buy and sell at any given moment.

The dependable banker’s bonds pay out a bi-annual coupon. He honours the holder five pieces of silver every six months. The bonds were initially sold for one hundred pieces of silver. If demand for the bonds increase, people will offer more than one hundred pieces of silver for them. They may offer one hundred and eleven. The interest rate now drops to around nine percent, from ten percent. You pay one hundred and ten for the bond but still get ten silver pieces as a coupon. That may be still attractive to lots of people. The bond value has inflated, akin to more air being forced into a balloon. With a thousand bonds in circulation there is now an extra eleven thousand pieces of silver wrapped up in them. When someone sells a bond, money is drawn from the value of all the bonds in circulation, a little from each. The price of the bond falls a little to compensate for the money drawn out. The intrinsic value of each bond is always one hundred pieces of silver irrespective of the current market spot price. The price correlates closely with sentiment; confidence in the future performance of an asset. Sentiment is often unreliable and thus some can profit from predicting the change in sentiment.

Those that store their wealth in currency rarely do as well as those that store their wealth in a range of physical assets. Currency tokens, promissory notes, bonds have no intrinsic value. Metals, foodstuffs, buildings, gems etc appear to have intrinsic value attached. They have utility and a tradable worth. Context is all. A silver coin is useless in the desert. Water becomes valuable to the thirsty. Wealth is not only found in physical assets. Know-how is wealth too. Knowing what works through years of refining a method is an asset to the holder of that know-how. Humankind has built roads, railways, airports, pipelines etc that underpin the wealth of a nation. Whilst the food is grown, processed and then eaten, the wealth made and destroyed, some progress is made with infrastructure development.

I pick apples from my tree. I have gained via economical value added, the conversion of sunlight, gases and minerals into an edible product. I sell hundreds to a wholesaler who splits into lots and sells them to small vendors. The vendors sell the apples, one by one, to hungry people. The apple merchants gain from market value added. The person eating the apple destroys the wealth contained within it. However, they derive energy and sustenance to work and live. This is economic flow. Along the way, the economic flow can lead to more overall wealth, if those consuming food and resources build, create or enhance the environment. We can use what we build. What we build has a value attached. What we build makes life more enjoyable, safer, more comfortable and more pleasant. The structures held within a nation is its wealth. Water pipes which provide you water to shower with, is just one of many such things. Your individual contribution can be positive or negative according to how much you add or take away from the nation’s structures and capabilities. Then you die and your burial/burn-up becomes an economic cost.

Some assets are inert or underused. A large dwelling with a single occupant is an underused asset. Ten people could comfortably reside in it. Some well-maintained roads have low traffic passing on them. Asset utilisation dictates economic flow and thereby the volume of potential economic value-added activity that can be achieved. A set of people living in cramped quarters may be gladdened to find themselves with more space but the increase in space may have no effect on their productivity. Those living in cramped conditions have an incentive to improve their lot. That incentive will push them to work hard, study hard and find the will to progress. Judgments can be made based on principles, morality or economic hard truths. A fairer world is fairer for some and much less so for others.

We stive for fairness by ignoring what happens in other nations. We might insist on safe practices in the workplace, fairness in pay and a nice work life balance. We push for this whilst buying things from other nations that pay no attention to safety, are paid miserable amounts for what they do and toil from dawn ‘til dusk. Socialism is only to be in my backyard – the rest can go to hell.

Is it fair that someone earns more than someone else? If you work for twice as long, many expect double the pay. If doing piece work, are you to be paid by the amount you get done or is it not fairer to split everything between all those involved. Should a talented individual get the same remuneration as those that support them? Does the lead singer in a band deserve a greater share than the backing singers and musicians? It is always going to be unfair if you are born with an ability or disability. Can tax go some way towards reducing the disparity, redressing the gains made though efficiency and good fortune? Do we address every loophole that people find to carve out a bigger slice? There are trade-offs. Wealth with time and freedom. Wealth with pressure and responsibility. Work and leisure, leisurely pace. The answers to these questions lie with our fixed preferences. Some prefer the idea of handling their own affairs. Others like to see the government take greater responsibility for how wealth is distributed. There will always be a hard-core bulk of individuals who have a low economic peasant status, relative to a minor few who will have significantly more. That applies in all systems, all societies, in capitalist nations and socialist ones.

What has it got to do with you? Why are you interfering. What right do you have to interfere with other people’s affairs. Do you complain that your next-door neighbour is married to someone far more attractive than your husband. Do you complain that other peoples’ children can run faster and further than yours. Are you envious of your friend’s artwork. Should they be forced to use that talent to paint the ceilings in the civic halls. How do you decide what should be taxed and what should not. What is the basis for your determination. Can your neighbour grow vegetables on his plot of land and feed them to his family? Should they hand most of them out to others instead. They tend their garden in their free time whilst you sunbathe, yet you want them to feed all and sundry whilst you choose to relax.

Each contributor to an economy enables doctors, the police, teachers and so on to be paid. Even where the contribution seems small and the tax paid negligible, the work done has an input. Division of labour enables more to get done. A surgeon can't operate safely in the operating theatre if it is not cleaned. A cleaner might be viewed as a lowly individual but performs a vital function. If the surgeons had to clean, then that time would not be spent carrying out clinical procedures.

A pinch of carbon can be worth next to nothing or quite a lot. It all depends on one key fact. If you do not know this key fact you should not be reading a book like this. You should return to school and pay attention this time around. The fact; structure. When structured in a certain way, carbon might be worth more in the love domain than the money domain depending on who you present it to. The structure of atoms dictates value.

Timothy spoke out against the union of socialist workers group. That was a mistake. A murmur to himself would have got it off his chest without alerting the union members. What he said was akin to blasphemy. An arrest warrant for Timothy has been issued. Anyone that knows his whereabouts must report it immediately. Much of the populace side with Timothy, they largely agree with what he said. Few are willing to notify the union if they see him. As the weeks pass, and Timothy is yet to be located, a reward is offered. Whilst many will agree with what Timothy has done, a financial bounty is more agreeable. The reward is equivalent to one week’s wages. The reward works instantly. Unless Timothy is immensely revered, people will side with money. Selfishness wins.

Money makes money, new furniture does not. What we go without today comes back tenfold in time. It is not complicated. You don’t need to be a wizard who invents something. We can simply find a market and operate in it. Maybe we can do it better, do it in a better location or just be more diligent. Think of what service/business/product you are going to offer. Put a plan in place. Implement it. That is all it takes. The plan will invariably overestimate the number of sales and underestimate the hidden costs. The plan will probably aim too low. If you aim to make a thousand pieces of silver a month and make half that, that it is better than aiming to make one hundred and making half of that. Has the plan considered the realistic maximum potential? Can it be expanded? Can you use the power of duplication? Are you just messing about?

Lucy knew there would be demand for what she does. However, why buy tools if those tools will only be used once. How many people want what we plan to sell? Can we sell a few prototypes first to gauge the level of demand. How much will it cost to make people aware of what we hope to sell.

If you want to be rich, then mix and mingle with the rich. Leave the losers to their own devices. Your mentality changes when you are in the company of those that succeed. Some think they are successful well before they have built up a decent cash pile. Keen to impress they get an oversized office and kit it out beautifully. Such businesses have the same mentality as a firework, bright and exuberant but short lived.

Do you truly get more pleasure from work than play? What is all the work is for if you end up too old and worn out to enjoy it. Some are not able to resist that extra deal, to make even more money which may be surplus to requirement in hindsight.

I am not in their shoes, I am not in their position however, I was once. I was poor once upon a time. To escape poverty, I had to make sacrifices. It fascinates me to see someone pawn an item at a rate of thirty percent per month. They borrow one hundred and pay thirty back the first month, then another thirty the second month. By month three they have near enough paid the same in interest as what they have borrowed. If they went without for three months, they would have ninety saved. There is no helping these people, they enjoy keeping bankers rich.

There are some oddities within the world we live in. Clare pays ten pieces of silver to have her hair washed and trimmed. Had she visited another country, she could have had the exact same hair wash and trim for one piece of silver. The exact same service for one tenth of the price. Nations manipulate the economic system to create a disparity. All nations have the ability to manipulate their economic system to compete and reduce the disparity. Many do. Eliminate corruption, allow free enterprise, ensure property rights are respected, attenuate crime, allow the power of the free market to flourish, coax the idle into playing their part.

Those that end up wealthy have a different mentality to the peasants. Even the poorest of the poor could save a small percentage of what they receive to gradually build an investment pot. However, the attraction of spending what they have for the needs of today overrides the potential for longer-term prosperity. Many emergencies can be fixed with money. Having money put aside for such occasions helps us worry a lot less. All one need do is save a tiny amount each week and build an emergency fund. Even those in relative poverty can save a little.

Whatever you build, create, collect or hoard, you are only the temporary custodian of things. It all gets left behind when we go. Wealth, a fantastic family life, a beautiful partner, time, health. What would you swap. I found myself far more interested in going to an inner-city skateboarding park than finding ways to accumulate more wealth. It was supposed to be for zooming about on wheels, but we were zooming about hand in hand dancing. And this is what philosophy is about. Working out what it is all for - for us individually. Some things money can’t buy, but if I hadn’t had the money, I would have had less time for fun.