Money is a language. A contrived language. It is the language of commerce and trade. Commerce and Trade are the foundation stones of human society. It's a highly rigid mathematical language. It has to be, since it usually represents the most important transactions in society: the exchanges of labour and time. Understanding this language, being fluent in it, are essential qualities if wealth is what you seek.
The language and its workings are not as difficult to learn as you may think, but the bankers are reluctant to teach us. They confuse the whole subject with an endless stream of arcane terms and confusing concepts and acronyms. The short answer is: they do not really want us to know. They fear that if we all learnt the secrets of money (as we should), then their own privilege and power over it would end, along with their own wealth and status. This is a fact!
So to unpack this accusation, I will start gently by going back in time and unpacking what money is, and what makes a money good or bad.
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We all instinctively know the price of things that we use regularly. A litre of milk, a loaf of bread, a kilogram of meat, a litre of petrol, the monthly rent of an apartment, a flight or train ride, a car, a doctor's visit. This becomes very clear once you step out of your own monetary area and begin to use a foreign currency. You are suddenly very disorientated with respect to the value of things.
This quality is called the Unit of Account. It is your local currency's unitary quality. It allows you to rapidly enter into negotiations regarding value with confidence.
Again: the sudden discomfort when negotiating in foreign currency units.
This is one of the qualities of money. A good money possesses at the very least, two other very important qualities: It must be accepted as a Medium of Exchange; and it must be able to be used as a Store of Wealth.
When you go to the supermarket to buy your supplies for the week, you enter assuming that the currency you have will be accepted at the checkout. This assumption is not always straightforward, and when societies suffer from poorly managed currencies, confusion will arise as to what currency(s) can be used in each exchange. Anyone living in a country who uses the USD as a shadow currency in parallel to their local currency knows this. This quality is called Medium of Exchange. Governments do not like to leave it up to the public to decide which currencies they prefer to use.
Earning money is tough for most of us. It quite often requires us to exchange our precious time for currency. In exchange we accept a pre negotiated amount of currency. The currency we choose (or is chosen for us) is the vessel in which we trust our time and labour to be preserved for further or future exchange.
If we did some work today and earned 10 units of currency, we might spend them today, but we may also want to store them for future use (defer consumption). We expect those 10 units to buy at least the same amount of goods and services in five year’s time as they do today. Those 10 units are a Store of Wealth.
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Until quite recently with regard to human civilisation (the last century or so), the market had spontaneously chosen what the best money was: Gold and Silver metal. These two metals displayed the best of our three qualities: Medium of Exchange, Store of Wealth, and Unit of Account. In addition to these desirable characteristics, Gold and Silver possess a fourth, less well understood although equally important quality: No Counterparty Risk.
This means that when you hold a piece of gold or silver in your hands, your ownership is absolute by virtue of your possession of it. If you hold a cheque, or a bank note, your ownership is contingent upon the cooperation of a financial institution. You may dispute this aspect when it comes to bank notes but read on.
The currency in your bank account, or even the paper bank notes you have in your pocket have counterparty risk. Your bank may choose to restrict your access to your accounts (Canadian Truckers protest, March 2022), or a government may unilaterally decree that a certain denomination bank notes are no longer valid (India, November 2016), wiping out the store of wealth quality of the currency with a careless edict.
Counterparty Risk is quite bad, because it is very hard to quantify, and as such, hedging strategies are likewise very difficult. This is why once the trust in the counterparties becomes fractured, one quickly finds the only option left is to begin migrating to another currency or money. Perhaps we are seeing this play out larger than life in the global south.
Upon the launch (March 2022) of the Russian Special Military Operation in the Ukraine, the US being followed by many Nato nations placed harsh sanctions on Russia, including disconnecting much of its financial infrastructure from the SWIFT system, and going as far as to freeze some 300 billion USD of reserves of the Bank of Russia, held in western institutions.
Translation: Russia trusted US banking institutions. The US has unilaterally froze these funds and denied Russia access to them.
Nations of the global south took note. The message was loud and clear: If you get on the wrong side of the US, they are willing to freeze any funds you have in their system as blackmail or punishment. Welcome to counterparty risk writ large!
Whether you know it or not, all of us face a similar situation with our own banking relationships. A case I know personally occurred when a disgruntled minority owner of a company managed to freeze the assets of the whole company illegally. All it took was a sympathetic bank manager. It was an act that could have landed the bank in some warm legal water, but due to timing, the perpetrator achieved their goal. (The company was mortally wounded from this, and has since liquidated. The perpetrator, and the bank have yet to answer for their crimes. The founders are much wiser for this painful lesson)
Lesson: Counterparty Risk matters! BIG TIME!
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You work, you toil, you sacrifice valuable time. Time which you would rather spend with your family and friends. Sometimes you even risk your health or even your life for a paycheck. And what is in that paycheck? A bunch of currency units. Today it's not even given to you directly, but instead given to your bank. They politely show you how many units you now have. The units that many think define their status in society.
The dirty secret is that while you are giving your life blood for these units, hidden behind closed doors and arcane terminology, the banking system is quietly generating these units out of thin air and sharing them with the insiders. The Cantillon effect (Richard Cantillon - France 1680s till 1730s) describes how newly created money is not evenly distributed. The dirty secret is that the very wealthy stand much closer to the money printers than you or I do, and they know exactly how to make it sing to their tune.
I bring you back to one of the core qualities of good money: Store of value. This could be the most important quality of a good currency or money, and the one which is most often violated.
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Gold and Silver may exhibit very strong qualities that make them good money, but today we live in the 21st century and global trade requires a quality from money that Gold and Silver struggle with. in the 21st century, Gold and Silver have lost the edge as a Medium of Exchange. I.e. it's not practical to send silver coins as payment for your online purchase. The transportation of precious metals is costly, risky and complicated. Additionally, custody of it is also complicated for businesses any larger than a sole trader.
Perhaps we require another quality of a good money: Storage and Transportability. Suddenly we see that if we introduce a counterparty into the world of precious metal as money, in order to negate the storage and transportability problems, we risk replaying the fiat money debacle. We should not forget that the whole idea behind paper money (the first abstraction of currency) is to be a placeholder representing an equivalent amount of Gold or Silver. Until 1971 the whole world operated on a more complex version of this paper representation standard. The necessity of a custodial counterparty in trade seems to be the genesis of the corruption of any paper currency.
Now we can introduce Bitcoin alongside gold and silver. Bitcoin scores very well in all the main qualities that make a good money.
Medium of Exchange: Bitcoin is quite a good medium of exchange. Onchain, it is not as fast as a credit/debit card for the consumer, but it is much faster for the merchant - a minimum of ~10min and certainty in half an hour, as opposed to days.
Bitcoin has an offline layer, the Lightning network, which is equivalent to the speed of credit/debit cards but with a fraction of the fees. Although similar to credit/debit cards, the Lightning network will only reconcile the transaction on the main blockchain (onChain) once you close the Lightning node . In the credit/debit card scenario, this is a several day process till the merchant has the money available to spend.
Store of Wealth: This may be the largest step change in money humanity has ever experienced. Bitcoin is not a physical thing like Gold or Silver, nevertheless it offers its users absolute digital custody without any counterparty risk. Such a thing was thought to be impossible in the connected digital world.
In addition to this, the network has hard rules embedded into this protocol that make it super hard money. I.e. virtually impossible to change the overall number of units in the network, or said another way, impossible to counterfeit. These include. The Bitcoin network is capped at 21,000,000 bitcoins. Only a simultaneous and organised majority of users can alter this. Today this is considered virtually impossible, and if the impossible somehow became possible, the act would have to be telegraphed a long time in advance. It is impossible to stealthily increase the number of units in the network.
But let's now be honest with one another, there are no foolproof store of wealth. Why?
Because unit values are subjective. A US treasury bill, a Tesla share, an ounce of gold, a one hundred dollar bill, a bitcoin, or whatever you may think of. All of these things have Store of Wealth quality, but their purchasing power varies over time. Historically, the ounce of gold has been the best by a wide margin.
Unit of Account: this is a completely artificial and arbitrary measure of value. If you live in the US(USD), then you understand the value of things around you in this unit. If you go on vacation to Japan(JPY), you need to deal with a completely different unit of account, roughly 140 times smaller. Most people need a calculator to convert from USD to JPY. So it matters not what the unit absolute value is, all that matters is your acclimation to the value.
So the quality of ‘Unit of Account’ is cultural more than anything. As a last word on this quality, it universally breaks down during periods of high inflation.
No Counterparty Risk: as mentioned above, gold and silver have no counterparty risk inherent to them. Self custody is a concept that has spanned millenia and is understood around the world. Bitcoin can be similarly custodied. But unlike precious metals which have an inherent volume, Bitcoins are held in a wallet represented by a pair of digital keys. These keys are simply long alphanumeric strings. These strings can be written down, carved into metal, or even memorised, unlocking a new kind of transportability that has never been seen before.
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This essay is not an endorsement of Bitcoin over something else. I paid a little more attention to it because most people are still quite unfamiliar with it, and because I am focusing on the core of whats in the money, its obvious we must look at it a little closer.
In the end, being able to earn large amounts of money does not make one a good steward of money. Many a true horror story exist about people who have suddenly become wealthy only to have this wealth destroy them through mismanagement. Understanding whats in the money is a necessary first step to sidestepping these pitfalls.
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