This page has been archived and commenting is disabled.

The Future of Money: A Matter of Functions Four, a Medium, a Measure, a Standard, a Store!

Reggie Middleton's picture




 

So, what is money? According to Wikipedia

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.

When currency is stable, money can serve all four of the functions above. Things get trickier when currencies are not stable. If we were all to be honest with ourselves, we'd have to query, "What fiat currency is truly stable over time?".

 

When unstable currencies or engineered forms of financial capital are brought into play the fourth aspect of defined money (and the least addressed) gains significantly in importance. Here we must differentiate and distinguish between true capital (economic capital) which comprises physical goods that explicitly and directly assist in the production of other goods and services, e.g. hammers for carpenters, paintbrushes for painters, wrenches for plumbers, tooling for factories, etc., and financial capital. Financial capital is funds provided by lenders and/or investors to businesses and entrepeneurs to purchase economic capital (ie.equipment) for producing real goods and services.

To explain why the 4th aspect of money's definition is important, yet often and in my opinion purposely ignored, let's examine the three concepts of capital maintenance in terms of International Financial Reporting Standards (IFRS): (1) Physical capital maintenance (2) Financial capital maintenance in nominal monetary units (3) Financial capital maintenance in units of constant purchasing power.

  1. Physical (economic) capital - We have covered already.
  2. Financial capital in monetary units is best described as basic accounting. It's how most financial reporting is done in the states (and in Europe). It fails to take into consideration the constant destruction of value of the fiat currencies, an aspect of the definition of money that is a foundation of money itself!
  3. Financial capital measured in constant purchasing power - something that effectively never happens. It is the "Real" value of money, adjusted for destructive aspects, ex. inflation, particularly purposeful inflation brought upon by a banking system that attempts to adjust and control the prices of goods and services for its own end (as opposed to the end that will benefit the masses) through the artificial manipulation of the value of the means of exchange, the currency.

Financial capital is provided by lenders for a price, commonly known as interest. This  price to attain financial capital is not the only cost though, for the price of the financial capital provided by lenders through things such as debt does not take into account the cost of currency maintenance destruction, or the purposeful manipulation of the currency value by the lender or lending system to which the lender belongs to to further its own means. This is why the prudent may wish to identify a single standard of deferred payment to avoid purposeful manipulation (otherwise known as cheating) by transacting in a denominator of debt that the participant believes to be dropping in value, ie. fiat currency!

Relation to debt-based society

A debt in any form is essentially a deferred payment. The fourth definintion of money, standard of deferred payment,  is usually what the debts are denominated in. The value of any and all money – including the most liquid and deep, ex. dollars or euros, or the oldest and revered, ex. gold and silver, or the newest and least understood, Bitcoin and cryptocurrencies – may fluctuate over time via inflation and deflation and often through direct manipulation and unforeseen results that stem from the same. The value of deferred payments (the real level of debt) likewise fluctuates.

Money, as Leading Economists Such As Paul Krugman Appear To Know It, Is Obsolete - There's a New Sheriff In Town

The definitions of money mentioned above are predicated upon the assumption that money must be dumb! What I mean by this is that money was defined in a time when the store of value was an inanimante object designed to represent a simple binary concept of buy or sell, that had no abilities other than to look or appear as if it had the value believingly bestowed upon it by society - or at least two of the participants in a particular transaction. What if money in this digital day and age was smart? What if money was able to do things besides just sit there and be called money?

Here's an example...

Historically, and up until now, deferred payment was/is based on enforceability of debts and rule of law. The rule of law, particularly engagement within the legal system is destructively expensive, time consuming and essentially the antithesis of friction free commerce, ex. capitalism. The rule of law is generally not relied upon when debts are unlikely to be collectable. For illegal transactions, or for low or zero trust transactions, gold or diamonds may be preferred as the medium of exchange and in those circumstaces there is no recourse in case of counterfeit currency (bogus, bank peddeled Mortgage Backed Securities, fake US dollars, etc.) is being used. — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars - which brings us back to where we started.

What if currency was smart enough to act upon a predetermined set of parameters, even after being released to the payee? What if trust never had to be a factor in negotiation fo payment, even in a negative trust environment? What if the highly ineffecient legal system could be wholly avoided in the risk/reward calculation of a monetary transaction? Would the existence of this possibility, in essence, demand a 5th definition for money - intelligence and/or malleability? You see, the cryptographic digital currencies are smart as compared to the dumb dollar or euro, or yen or yuan! It is this intelligent ability to control money during a transaction and even post transaction, the abilty to instruct money to disburse iteslf only open mutual agreement by all parties present, that appears to elude the prominent MSM economists of today. 

Furthermore, dumb money as purely fiat is truly without physical value or utility value as a physical or digital commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for all debts, public and private - including taxes, where in the US, it is the only currency accepted. Laws in place such as these essentially imbue fiat money with the value of any of the goods and services that it may be traded for within the nation that issues it. The fact remains though, the value of fiat money is held in belief and belief only, enforced by the whims of government. With this being the case, there is no true utility argument to be made for fiat currencies, including the USD.

Digital cryptocurrencies such as Bitcoin, however, have an implicit edge on the fiat currencies in that its utility (or use value) is dramatically leveraged as compared to fiat because it comes part and parcel with its own, virtually unassailable transmission system. In essence, this means that if Bitcoin, the USD and the EUR were cars, BTC would be the only one that comes with its own international roads open 24/7 that were able to bypass all of the toll roads and bridges, everywhere there was an Internet connection - not to mention power itself with a virtual fuel that was limitless and had no costs. Now, if one were to think of it, such an aspect is so valuable and useful (as in utilitarian) that not only does it qualify for significant use value, but in the very near future one could wonder how the world ever got along without it. Does this mean that a sixth aspect of the definition of money needs to be added - autonomous transferability!

This is why I say there's a new sheriff in town and the old schoolers whose eyes are not yet open should recognize that the future of money is here!

According to famed economist and NY Times pundit Paul Krugman, "To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value."

I counter these widely believed assumptions with the fact that the USD, the world's reserve currency, has not been a stable store of value. As a matter of fact, from its underpinnings (as described in the BoomBustBlog link below) and throughout its history, the dollar has consistently lost its value over time to inflation. Thus, as per Krugman, the USD is not successful!

As per Wikipedia:

To be widely acceptable, a medium of exchange should have stable purchasing power (Value) and therefore it should possess the following characteristics:

  1. Value common assets
  2. Constant utility [I have explained the constant utility of Bitcoin above, a utility which trumps the relatively dumb dollar]
  3. Low cost of preservation [the cost of preservation is a fraction of that of the dollar, with constant reprinting of physical dollars and coins and the power, machinery and labor required to do so; as well as the recircutlation of those new bills, not to mention the destrcution of the old bills]
  4. Transportability [This is moderately difficult with large amounts of physical bills, but much easier with the digital manifestation of those physical bills that most institutions deal with. The mere existence of the banks as necessary intermediaries and middlemen add signficant, and in this day and age of P2P technology, unnecessary costs and frictions and rules. This hampers portability significantly - no transfers on weekends and bank holidays, no low margin business models due to artificially high transaction costs, big up Visa, Mastercard and Paypal!)
  5. Divisibility
  6. High market value in relation to volume and weight [Bitcoin can't be beat in this regard]
  7. Recognisability
  8. Resistance to counterfeiting [A currency based on cryptography, need I say more?!]

As quoted from the Wikpedia link above:

"fiat money is the root cause of the continuum of economic crises, since it leads to the dominance of fraud, corruption, and manipulation precisely because it does not satisfy the criteria for a medium of exchange cited above. Specifically, prevailing fiat money is free float and depending upon its supply market finds or sets a value to it that continues to change as the supply of money is changed with respect to the economy's demand. Increasing free floating money supply with respect to needs of the economy reduces the quantity of the basket of the goods and services to which it is linked by the market and that provides it purchasing power. Thus it is not a unit or standard measure of wealth and its manipulation impedes the market mechanism by that it sets/determine just prices. That leads us to a situation where no value-related economic data is just or reliable.[3][4]" 

I will continue this missive in part 2 of the series wherein I will announce my efforts in bringing the beneftis of smart money to light. I'm sure these concepts and products will blow your socks off, even if you are an old school economist! For those who don't follow me, this is who I am. - Who is Reggie Middleton? I believe track record speaks louder than Op-Ed columns, degrees or TV show appearances. Let me know if you agree...

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/03/2014 - 16:09 | 4297541 Toolshed
Toolshed's picture

My opinion of Reggie has done a 180. This article is pure propoganda. Reggie must be heavily invested in bitcoin. He is just throwing out positive sounding nonsense while ignoring glaring dangers in holding an intangible currency. Bitcoin is not and never will be money. It is a digital currency. Currency is not money. The only semi-accurate part of his tripe fest is the definition of money, and bitcoin and fiat fail in that regard miserably. What has happened to your brain, or ethics, Reggie? Is this madness you are displaying the result of excessive Google glasses use?

Fri, 01/03/2014 - 17:35 | 4297855 Reggie Middleton
Reggie Middleton's picture

Or maybe your wrong. I don't hold much bitcoin at all. Bitcoin, now, that's another story. I noticed that practically every aggressive detractor of cryptocurrencies know very little about cryptocurrencies. I took the time to learn what they were from the ground up, with an open and objective perspective and I liked what I saw.

There's a reason why my track record is what it is - a lack of preconcieved notions has a lot to do with it.

Fri, 01/03/2014 - 20:51 | 4298370 Dick Buttkiss
Dick Buttkiss's picture

I hear you, Reggie, and am very much in your corner. Have been, in fact, since before you "came out" and am now putting together a cryptocurrency mining/arbitrage operation to reap the benefits of this revolutionary innovation.

Fri, 01/03/2014 - 15:48 | 4297446 RaceToTheBottom
RaceToTheBottom's picture

This guy is just downright irritating, no matter what he says.  Everything he says here is obvious

Fri, 01/03/2014 - 15:58 | 4297493 oddjob
oddjob's picture

Stating the obvious is a big business.

Fri, 01/03/2014 - 15:16 | 4297330 logicalman
logicalman's picture

If money was real and there was no inflation, it would be possible to save.

Start work at 20 and save 50%

Retire ate 60 with sufficient to live till 100 with the same lifetyle.

Of course, the evil that is income tax would have to go, along with the Fed

Only excise taxes are reasonable taxes. Income tax, as it is now is just flat out theft.

Fri, 01/03/2014 - 15:12 | 4297305 logicalman
logicalman's picture

I think Kanye's new currency will fix everything!

http://www.bbc.co.uk/news/technology-25588883

Fri, 01/03/2014 - 14:07 | 4297071 Bullionaire
Bullionaire's picture

Oh boy!  This comment thread oughtta be good!

Fri, 01/03/2014 - 15:27 | 4297370 Dick Buttkiss
Dick Buttkiss's picture

Yes, it should, and I for one have no doubt that Reggie is "right on the money."

Fri, 01/03/2014 - 15:47 | 4297433 boogerbently
boogerbently's picture

I thought Reggie was smarter than that.

Fri, 01/03/2014 - 15:56 | 4297487 Clint Liquor
Clint Liquor's picture

In Reggie's description of the properties of money, he missed one: Durability

Do NOT follow this link or you will be banned from the site!