Rob’s comments below are in italics.Derek’s comments below are in normal font.
We’re going to get back to a core topic today: the nature of money. At some point in the sovereign finance journey, everyone realises that the money that you thought was real in your pocket isn’t as real as you were led to believe growing up. So what else do we have to say on this?
First, at the end of the day, money is a tool. It’s a tool that can be used like any other tool for good or for ill. If you’ve got a knife, you could use it to prepare your dinner, or you could use it to stab somebody.
If you’ve got a hammer, you could use it to construct things, or you could use it to break things up. The same goes for money. It’s a tool that can be used to generate prosperity. We’ll say in more detail in a minute about how to do that, or it could be used to exploit and to expropriate, which is a lot of what’s happening at the moment. But it is value-neutral as a thing in itself.
So what is money’s purpose? Its purpose is to smooth the path of the accumulation of wealth. How is wealth accumulated? It’s accumulated either by creating it, that is by, let’s say, manufacturing something, or by growing food or other products from the ground. The accumulation of wealth is furthered by trade. Once somebody’s manufactured something, it’s of limited utility to them, assuming they could have made all of whatever product it is they wanted for themselves. Beyond that, the value lies in trading it with someone else to get something they want. Money is obviously the means by which they can do that.
Other ways wealth is increased are by moving things and people around. Things that are abundant in one region of the world have a much higher value where they’re more scarce. So moving them from where they’re abundant to where they’re less abundant is a form of trade. Money facilitates that. Operationally, the obvious nature of money is as a medium of exchange. There are two or three other classic definitions, but I wanted to examine its essential nature.
It seems to me that the essential nature is that it’s a store of energy. If you think about it, any work that we do requires energy. If we’re moving things around, we’ve got to use our muscles to move them. If we’re growing vegetables, the vegetables are essentially harnessing energy from the sunlight. The physical effort that’s gone into planting them and tending them and harvesting them is also an expenditure of energy.
Of course, some commodities are actual literal direct stores of energy, a sack of coal or a tank of petrol, a charged up battery. These are literally stores of energy. They are worth something. The money that could be used to purchase them is, if you like, a store of the energy of whatever work was done to earn that money. Is that a useful way of looking at it to you?
Yeah, so it sounds a bit like the fuel in your tank being a store of energy that originated from sunlight. We’re pretty distanced from this in terms of money actually being that store of energy. Thinking about all of the money that is going off to Ukraine in places that’s just been magicked into existence out of nowhere. I don’t think much energy went into creating that!
Exactly. That provides an insight into the system’s dysfunctionality, because what you have there is money that did not have the energy put into earning it in the first place.
So coming back to the classic economic definitions, I’ve already mentioned that it’s a unit of exchange. If I’ve got a violin, I need to eat. If I’ve made the violin, that’s a certain amount of energy gone into the construction of that violin. I can’t necessarily directly exchange that for a year’s supply of potatoes, for example, nor would I want to. I’d like to convert that into something fungible that I can use to buy my potatoes, pay my energy bills, maintain my car, and do whatever else I want. That’s the most immediate and direct way.
It’s also a store of value, in that I might do some work now, be paid for it, and not necessarily want to spend it immediately on other things. I’d want to put it to one side and be able to expend it at some later time that suits me.
For instance, you might want to wait until someone drives into the back of your car so that you need to buy a new car in a hurry. Not that that might have happened to me this week!
Yeah, exactly. It’s a unit of account, which means that, say, in a village situation, a farmer requires a set of new shoes for his horse but doesn’t have the wherewithal to purchase them immediately. So he makes an arrangement with the blacksmith that he can have the shoes now. He’ll pay them in a couple of months after he’s brought in the harvest. So the money represents the amount of the transaction to be settled at some future time.
Finally, money is a unit of measure. It’s to answer questions such as: How much profit did we make this year compared with last year?
Having tremendous rates of inflation can’t help with that measurement.
Well, this is exactly the point I was going to make. The unit of exchange, as long as you’re expending it as quickly as it comes in, inflation really cancels out. But any time there’s a delay between the two, as there is in this situation where you’re using it as a store of value or a unit of account, it’s clearly not fit for purpose. This is true in a situation where we have inflation, particularly inflation running at the rates that it has been over the past year or so. It’s likely to continue into the immediate future.
The same thing applies to its use as a unit of measure. If I’m trying to answer the question, how do my earnings this year compare with last year? If I’ve increased it by 10% but the actual purchasing power of the money has decreased by 20%, that’s not an accurate measure of change because the goal posts have shifted. So the periods of time when we’ve had stable currency, which was, for instance, the case in the United States between 1945 and 1971, or in the case of Britain between the late 1600s and 1914, was a time when the money system worked.
Within that environment, it served all its purposes. As we’ve seen and as we’re learning experientially right now in a situation where we no longer have that stability, it no longer serves that purpose. It undermines the actual smooth operation of commerce in all its aspects.
Money in my brain is associated with this idea of flow. If you think about the infinity sign, the number eight on its side, like it comes in and it goes out. Anything that impedes that flow will damage the long-term viability of whatever we’re using as money.
Yeah. Okay, so that was my reflection for today. It’s something that it does well to bear in mind because in general, we don’t actually go any further than the abstract notion of taking money for granted.
Everyone has an emotional connection to money as well.
Yeah, there is that too, which is not constructive.
No, that’s right. Do you think Bitcoin could eventually become money?
Well, I’ve been thinking about this. I recently saw an article about electricity generation in China. There was a sideways comment in that article about Bitcoin. It’s the first time I’ve noticed anyone saying out loud and explicitly what I’ve been beginning to feel about Bitcoin.
For one thing, the analogy of Bitcoin mining is actually flawed. It’s supposed to be an analogy of the mining of gold. Obviously, if you dig gold out of the ground, you can then trade that gold for anything you want. But it’s taken a lot of effort to pull that gold out of the ground. But once you’ve actually got the gold, it is persistent. It continues. It doesn’t require anything else other than making sure it doesn’t get stolen and moving it, if necessary, from one place to another to make transactions with it. It doesn’t require an ongoing effort.
Bitcoin mining was arguably an analogy of that when new coins were being created. But the supposed inherent advantage was that there was a finite quantity. We’re now getting to the point where virtually all of the coins that can be brought into existence have been. It requires the same amount of computation, which requires an enormous amount of energy going into the special purpose computers that do those calculations to verify each transaction.
As there are no new Bitcoins coming in, that has to be paid for by charges in the transactions, which undermines its long-term potential as a serious element in global trade. It doesn’t have the scalability to replace all other transaction mechanisms.
So its only real attraction is that anyone investing in Bitcoin is hoping that someone else will value it more highly and sell it. That is the classic characteristic of a Ponzi scheme.
That’ll go bust at some point.
I would suspect so. There’s obviously a great deal of effort going into maintaining the illusion. Another aspect of it which is concerning is the fact that originally this was propagated as being an anarchic freedom loving attempt to generate something that would be outside the control of the existing powers that be. Of course, now we’ve got major financial institutions and major banking institutions moving into it. China has apparently banned the trading of Bitcoin internally. So that is a factor.
Anyway, the point is that this article as a sideways comment actually suggested that the only merit of Bitcoin was that people were expecting somebody else to come along and be prepared to pay a higher price for it. Certainly, it is essentially a monetary exchange system, which even more than all of the fiat currencies in the exchange systems of the world, is highly volatile. The amount of speculative transactions completely dwarfs any transactions in relation to purchase or sales or commerce.
So I’m not making any predictions. I know I’d be speaking well out of turn. Everybody’s got to make their own decisions. It’s always been the case that sound advice for Bitcoin or any cryptocurrency is to treat it as a speculative investment. Don’t put any portion of your assets that you seriously depend upon into them.
So that remains the advice really, whatever happens. But the main point of this article was to highlight the progress of electrical generation capacity in China. This has really been quite extraordinary.
Probably the opposite of what’s happening here as well.
What’s happening in the Western world apart from various bits of disruption, has been fairly constant over the last 25 years. Electricity generation in the United States has been relatively constant at 4,000 terawatt-hours per year over the past 25 years. At the beginning of that time in the year 2000, China’s generation capacity was around about 1000 terawatt hours per year. It’s been climbing steadily. It crossed over that 4000 mark with the United States in about 2008.
It’s continued on the same trajectory. It has now surpassed 10,000 terawatt hours per year. What is also interesting is that very nearly 50% of that is from renewable sources. So, although it’s still burning substantial amounts of coal in coal-fired stations and has a number of nuclear stations, the main expansion is in wind power, water power, and solar generation.
So that is a serious indication of the wave of the future. To what extent we’re going to have an all-electric world is something, again, I’m pretty sceptical about. But some mix of all of these things. Of course, long before the end of this current century, we’re going to have exhausted the economically viable supplies of virtually all of the fossil fuels except for coal. Of course, coal is both the dirtiest of the fuels and the least flexible in its use.
Well, just quickly, what do you make of the assertions that oil and gas are actually renewables. Do you think that’s not true?
I don’t think it’s at all true.
There are pathways to liquid and gaseous fuels from sunlight, most of which involve an electrical phase. As we stated before, every transfer of energy involves some loss. So the more stages you go through, the fewer you get to. We talked a couple of weeks ago about hydrogen and how it wasn’t really a terribly practical storage mechanism. It isn’t an energy source; it’s an energy storage system, but it’s not an efficient one in any manner.
For a highly portable energy store, liquid fuel is probably unbeatable. So when we no longer have sources of that from what was stored over millions of years underground, we’re going to have to generate it from current sunlight. I would think some pathway from solar generation of electricity through to chemical processes to produce ethanol or methanol is probably the most promising. That would involve drawing carbon dioxide out of the atmosphere, which would then be released in the same quantities when the ethanol or methanol is converted back, whether by burning or by developing fuel cells.
The future of vehicles, I would bet, over the next half a dozen decades would be essentially electric vehicles with regenerative braking. So you get a good deal of the energy that’s gone into the motion back into a battery to do it. Rather than the battery being the motion energy storage, it’s the secondary one, just for regenerative braking. The primary energy carrier is done by ethanol or methanol. We develop a fuel cell to generate electricity, which drives the motors that power the wheels. That’s quite an exciting prospect.
Yeah, the batteries in electric cars are obviously a big problem.
Yeah. Okay. Well, that will do for today unless you’ve got any other things you wanted to bring up.
No, I will link to the article about China and electricity and Bitcoin so people can check that out as well.
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