What is Money? Money is any object of record that is generally accepted as a payment for goods and services and repayment of debt. The main function of money is as a medium of exchange, a unit of account or a store of value. Money originated as commodity money, but today nearly all money is fiat based money.
Commodity money is money that is backed by something, like gold or silver, whereas fiat money has no intrinsic value, and is only backed by the government which issues it. To most of us, money is cash, and we don’t really think beyond that. We know that if we have cash in our pocket we can buy whatever we want to the value of that cash. Now days, larger purchases for a new car or house are done via electronic transfer, such as credit or debit card or bank transfer, but we still consider this real money as ultimately we have to pay it back if we use credit. We do this by working hard most of our adult life, to earn money so that we can thrive and survive. There are certain unwritten rules we learn about money, or what we might term as the Law of Money.
The First Law: Money does not grow on trees!
We usually learn this law about money when we are children, from our parents. We ask them once too often to buy something for us and the response comes back: “Money does not grow on trees.” The lesson in this law is that money has value and we cannot just go out to the magic money tree and pluck some dollars off the branches to go and buy whatever we want. We have to provide goods or services in order to get money to buy things we want. Pretty soon after we have learnt this simple lesson as kids, our parents follow this up with the concept of pocket money, where they give us a small amount of money in exchange for doing jobs around the house on a regular basis, like cutting the lawn, emptying the bins, or cleaning the family car. We learn that money has value.
The second Law: Real Money is in the pocket of the worker
We all know the term cash is king. You see signs in shops or service providers that say no credit cards accepted, no checks accepted, but you never see a sign that says no cash accepted. We only trust bank accounts and banks to a certain extent. If we lose that trust, there is a run on the bank and we all want to withdraw our cash. This money that we withdrawal from the bank has been earned in exchange for either goods or services, and has been taxed, and ends up in the pocket of the worker. It is real money, which is passed around in the real economy. This money represents real spending power in the economy, and when in the bank this money belongs to the depositors and when withdrawn ends up in the pocket of the worker. Real money flows into the real economy from the pocket of the worker.
The Third Law: Real Money is finite:
The notion that real money is finite means that just like a natural resource it will run out. Although the fact that most money today is fiat money, and has no intrinsic value, we consider it to be finite and therefore something we should use wisely. From an early age we are encouraged to save money. We all have heard of the term save your money for a rainy day. This means that in the future we might get sick, lose our job, or have an unexpected expense, and we should save some money for events like this. The notion that our money will run out, or is finite, keeps us motivated to work and theoretically save. Real money is finite and a resource we use scarcely.
The Fourth Law: There are consequences for ignoring the first three laws.
Real money has been substituted for fake money. In August of 2008, the entire banking system held about $50 billion in actual cash reserves while clearing trades of USD $2,996 trillion per day. Yet every one of these trades involved a noncontingent promise to pay hard cash whenever it was asked for. This is the root cause of the financial crisis we are in today. The fake money, which was grown on trees and never ever entered the pocket of the worker, was considered infinite by the system that created it (the banks off balance sheet derivatives market) and tried to do the impossible: convert itself into real money. In attempting to do so, the fake money broke the law of the real money, resulting in the crash of the fake money system.
The Law of Money will prevail, and the fake banking system will fail!
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.