When Money Can’t Be Trusted

Money and wisdom do not always go hand in hand.  The Bible says in Ecclesiastes 7:12:  “For wisdom is protection just as money is protection, but the advantage of knowledge is that wisdom preserves the lives of its possessors.” (New American Standard Bible, 1995)  I can’t possibly know what the author of those words long ago had in mind when he wrote about money, but in this column, money has no intrinsic value, but it serves as a store, or warehouse, of value.  When you work, you produce something of value, and then you seek to trade your product with others who have produced other things of value. 

Money is a symbol of the value in what was produced by work.  Money facilitates the trade, of value for value, between people.  It is easier to “store” or “warehouse” money than it is to store all the goods and services that that money represents.  Think about what a ridiculous burden it would be to store all the commodities we use in a single day of modern life.  We don’t stock up on a year’s supply of Cheerios, for example (at least not most of us), because we know that with this thing called money we can go down the street and pick up a box of cereal at a moment’s notice (at least as of this writing!).  And what do we trade for that box of cereal?  We exchange money.  We can’t eat money, but we can use it as a store of value and a medium of exchange.

Our modern world would not be possible without money to facilitate trade. . . .  The value of money is its universal acceptability by anyone and everyone.  If we had money that no one trusted, our money would be useless as a means of exchanging goods and services.  No one would take our money if they suspected they couldn’t immediately turn around and use our money (now their money) to trade again with yet others.

And therein lies our problem, dear Reader.  Because money is not always trusted.  Sometimes money is not trustworthy.  The problem begins when those in control of money begin to see money as the value itself, rather than the symbol of value.  The value is in production, i.e. the use of our minds or muscles to produce something, anything, some good or service that others want and are willing to trade for.  Without the production of goods or services as the original value, money has no meaning.  But sometimes those in control of money begin to see the money, and not the production it represents, as a value in itself.

What does this mean?  In concept, let’s say Joe Smith has produced some good or service, and let’s say the value of one unit of that good or service is valued (by buyers–meaning that’s what they’re willing to pay for it) as $1000.  Joe sells one unit of his product.  He now has $1000 to show for his effort.  But $1000 is not enough for Joe.  He cannot buy everything he wants or needs with $1000.  Joe says he “doesn’t have enough money”.  What he means, whether he knows it or not, is that he has not produced enough, at the current rate of exchange in his market, of his product.  If he produces and trades more units of his product, he will receive more money.  Joe’s shortage is essentially a shortage of production, not a shortage of money.  Money is the “stored”  value of his production. 

When those in control of money (always governments, who universally hold a monopoly on money)  see the money itself as the value, they believe they can control how and under what circumstances people trade by manipulating the supply of money.  This is important.  Governments do not do well at producing things. Governments excel at telling people what to do with their money, and how much of their money they are allowed to keep, and government does an outstanding job of initiating the use of force if those people do not comply.  Government in the market place is an example of the few dictating to the many what is best for everybody. 

There is a limit to how much of people’s money a government can take.  That limit is set by the patience (or stupidity) of the population, or the cleverness with which the rulers persuade them to part with their money (remember–money as the symbol of what each of them has produced.)  In a democracy, when the patience of the people is exhausted, they vote the rulers out of office.  In a less democratic state, the rulers point guns at their people and the people have to ask themselves if they really want to die for this.  Guns can be very persuasive.  But rulers feel safer if the population feels content.  That is why it is much, much better if the population can be persuaded to vote themselves into slavery, rather than crudely having to point a gun at them.  Slavery, without being too elaborate,  means you work and someone else lets you keep just enough of your earnings to keep you alive to go to work again.

To keep the population happy, you have to give them goodies, treats.  Things for free.  Everyone loves freebies.  Besides, freebies distract the population; they start watching each other, making sure they are getting their fair share of the freebies; making sure others are not getting a disproportionate share of the freebies.  After all, that would be unfair.  Then the rulers step in to make things fair.  And everyone is grateful, and they all forget that it was their money, their production, their time and effort, to begin with.

The freebies are expensive.  Even slaves have to be fed and housed.  And regulating all their activities, to keep everything fair, is expensive.  Because all these activities redistributing everything, and regulating everything, have to be paid for.  Sometimes this expense is bigger than even the rulers can afford.  They can only afford to give away in the amount to which they have already taken, in the form of taxes.  But when the population is unhappy and quarreling over who got what, and the unfairness of it all, the best way to quiet them is to give everyone still more.  It dulls their wits; it distracts them, and they get quiet again, for a while.

But the rulers know they are at the line.  There is a line the rulers must not cross.  No one knows for sure where that line is, but when rulers cross it, they sometimes don’t get to be rulers any more.  They get voted out, or fights break out for control of the guns.  Then everything falls apart.  It gets ugly.  People stop working.  Because they stopped working, they stopped producing, and  they have no money.  So they start stealing from each other. Sometimes they kill each other.  Things get out of hand.   So rulers have to be wise.  They have to know where the line is.  They can’t cross the line.

So where do the rulers get the money to pay for more freebies, without crossing the line?  They borrow it.  And they promise to reward the people who lend them money by paying interest.  How do they pay for the interest on the borrowed money, since they are already out of money?  They print it.  There is now money out there in circulation that did not come from increased production.  There is now a disconnect between money and the production values it is supposed to represent.  Something very important has just happened.  There are no announcements in the paper or on the six o-clock news.  When production has not gone up, but there is mysteriously more money available, everyone is willing to pay more, because after all, there is more money chasing the same goods and services.  So prices rise.  The value of the goods and services has not changed intrinsically; a banana is still a banana, a car is still a car, a book is still a book.  It just takes more dollars to obtain one.  The banana hasn’t changed; the dollar has.  A dollar buys less.  The dollar has gotten cheaper.  The dollar has lost its purchasing power.  The dollar cannot be trusted.  Money has betrayed its owners.

Whoever is in debt wins.  If you borrowed $100, and repay that debt with $100 that now buys only $80 worth of goods and services, you got something for nothing.  You got a discount without having to demand it.  On the face of it, you repaid the same amount you borrowed, but the same value is not there.  The dollar is still a medium of exchange, because people still trust it enough to use it, but it has failed as a store of value.  Money lost its value.  And money lost its value because the rulers disconnected money from its source:  the work, or production that the money represents.

There are winners and losers.  The winners are debtors, because they get to repay with devalued money.  The lenders lose.  They get their money back, but that money has less value than when they lent it.

Who is the biggest debtor of them all?  The rulers.  They get a big discount they never had to demand.  It was so much better than a new tax.  It was a tax, a stealth tax.  No unhappy population.  No riots in the streets.  The freebies still flow.  And the rulers get to keep ruling.  The rulers were wise.  The population was foolish.  The population thinks it has more money, but the money buys less.  It’s an illusion. Everyone’s happy.  It couldn’t be helped.  Who can understand such things?  Who is John Galt?

Money is a protection.  You can buy things with money; goods, services, toys, tools, power, sex, even pretend love.  But if you don’t understand money; if you don’t understand that money is only a symbol of values produced by work, creation, innovation, integrity; if your money is greater than you are; then, indeed, you will lose it.

“The advantage of knowledge is that wisdom preserves the lives of its possessors.”  Money, properly defined, is not the root of all evil.  To say that honest money is evil is to say that the productive use of our mind (aka work) is evil.  However, money disconnected from its source and meaning in productivity, is evil.  Money as something for nothing is evil.  Because such money is no longer a store of value.  The value it supposedly represents is a fraud.  Such money requires no diligence, no work, no mind.  It only requires the backing of a gun.  Eventually such money can no longer even pretend as a store of value; when the mask is dropped and it is sufficiently devalued, even the densest in the population will reject it as a medium of exchange.  That’s called hyperinflation.  When that happens, people will find something else to use for money. Usually gold or silver.  When the population doesn’t trust their paper money, the price of gold and silver rises. 

In the last 100 years, the dollar has lost 97% of its purchasing power.  That’s why it takes so many more dollars to purchase an ounce of gold or silver.  Gold and silver store value reliably.  Paper (fiat) money doesn’t because rulers have severed it from the source of its value–production.

Wisdom is applied knowledge.   The difference between the wealthy and the poor is often the difference between what they know, both in their mind and in their gut.   There are many academics with advanced degrees who probably couldn’t effectively run a lemonade stand.  But they understand grand concepts extraordinarily well, and can explain it to you in long, multisyllabic and arcane terms.  Just as I thoroughly understand the concepts of the game of basketball, but am a lost cause participating in a game of it.  On the other hand, there are families, dynasties even, where the art of trading is a legacy that gets passed along from generation to generation.  They hear it at the dinner table, in conversation; it is almost in the air they breathe.  At the street level, they GET IT because they were raised around it.  They will succeed at ANY business because they know what works, and they are constantly evaluating results and adjusting their plans accordingly. 

Wealth is created by 1) producing goods or services that others will trade for;  2) reinvesting the surplus remaining from such trades in further productivity.  The values in all transactions are stored in money, and that same money serves as the medium of exchange.  The money must be trusted by all for the system to work.  When a government prints money with no basis in production, all that happens is that it takes more money to purchase anything.  Although this may very temporarily make us all feel that we are richer than we are, because all the numbers have gotten bigger, what the government has really done is stolen from the savers from whom it has borrowed.  It repays its debts with intentionally devalued money.  The nations creditors know they have been defrauded.  When creditors are being cheated, they no longer want to loan money or invest money, because they know they will be repaid with money that has less buying power than when they loaned it or invested it.  Or if they do continue to loan or invest, they will only do so at higher interest rates as their reward for their increased risk.  But if interest rates go up, the economy as a whole contracts, because the cost of money has gone up.

So our government has a further solution.  It will continue to print the money (digitally), which will continue to devalue the money, and it will continue to borrow, but from itself.  The Treasury will borrow from the Federal Reserve, and the Federal Reserve will print the money to loan to the Treasury.  The Treasury will use its borrowed money to pay interest on its other debt, and will also loan it out to its member banks.  The overextended member banks will  put some of the new money in the back room as reserves, and only then begin to loan it out to the market.   

This is our government’s Master Plan to improve the economy.  We will manipulate the money supply so we can repay our creditors with intentionally devalued money, and we will give our citizenry a fraudulent sense of well being by injecting into the economy new money with no basis in production, in order to create the illusion that things are better than they really are.   They are betting the farm that we are either too busy or too lazy to educate ourselves.  If you are an activist, you may seek reform at the polls.  Or on a more modest scale, you may simply decide that is time to inform yourself.  It is not enough to earn money.  You have to learn  money, because not all money can be trusted.

This is a financial literacy newsletter dedicated to learning about the financial world we live in, and translating the concepts into concrete financial possibilities for ourselves and our families.  It is dedicated to wealth-building; the reinvestment of the excess of our earnings over our consumption.  In case you missed that, this newsletter is for people with the self-discipline to spend less than they earn, so that they can invest the excess and put that money to work for them.  Wealth is about your money working for you, not you working for money.  Financial literacy is about learning the language of money and wealth.  You can learn it here.  Tell your friends.

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