Wednesday, January 4, 2012

What is "money"? Is it the same as "currency"? What about gold?

What is money? Everyone talks about it, but what is it exactly? Why did we created it the first place? A lot of people seem to blame money for all the problems in the world, and yet "money makes the world go round".

In order to truly understand what is happening today, we must first explore how money came to be, and the purpose it serves.

In primitive human societies, humans were all hunters, with no or little/simple tools, so there was no real specialization. These people barely had enough in order to survive - nothing more.This is why there was no private property, or trade transactions (some primitive races in places like the Amazon still live in such a state).

But then humans began to improve their tools and weapons, and they also developed agriculture as well, which was a huge leap forward. It today's terms, people become more productive, and "specialization" started to appear, as some people became "professional farmers", some others were "professional craftsman" creating tools etc. For the first time in history, there were different "professions" - this "specialization" allowed people to become more productive in more and more tasks, and every "professional" (eg farmer, hunter, builder, craftsman, etc) was not self-sufficient, but also relied on others in order to live a better life.

By increasing productivity, humanity could create more wealth than before, and by increasing specialization some people (eg the farmers) had a surplus of wheat, and some other people (eg the craftsmen) had a surplus of tools or clothes. So, this is when private property firsts appears, and trade starts to grow, as one person exchanges "something that belongs to him" with "something else" that belongs to "someone else".

This barter system had some problems however: For example, some products are not easy to carry, or they don't last long (food is a good example, as it must be consumed within a few days). Furthermore, as specialization deepens, there are more and more trade transactions.

This is why people turned to something else, a "super-product" that could be used as a benchmark for all other products: Money. All other goods have a value that could now be expressed through it.

Mankind has used many different forms of money, but gold (and secondarily silver) is the form that dominated over all the other forms. The reason is that gold is durable, easily transferable from one place to another and rare. Many other forms of money where tried, but nothing could beat gold's advantages as money.

Today, specialization has grown to an incredible degree - capitalism has created an international system, where everyone is more or less dependent on others from around the world in order to live a good life. When such systems collapse, humanity suffers greatly - here's Tony Jackson from the Financial Times:
Four years ago, I related in this column how a stockbroker acquaintance of mine had likened the outlook to 1929. A couple of weeks ago he was back on the phone. Forget 1929, he said: we are looking at the Dark Ages.

The Dark Ages, of course, are something else again. But let me repeat here what I said four years ago: that the purpose of such comparisons is not to indulge in fancies about history repeating itself, but to expand our conception of the possible.

Quantifying the effects of the collapse of the Roman Empire is not an exact science. But from the start to the finish of the first millenium AD, according to the economic historian Angus Maddison, the economy of Western Europe shrank by around a quarter, and that of Italy itself by nearly half.

What this meant for Britain has been spelt out by the Oxford historian Bryan Ward-Perkins. After the Romans left in 410 AD, the archaeological record suggests that the economy slumped to a much more primitive level than on their arrival nearly 400 years earlier.

The reason is clear enough. The more complex and specialised an economy becomes, the more helpless its individuals are in the face of breakdown. The Romans introduced a higher level of complexity to Britain, then took it back home again.

It is here that parallels with today start to look rather stretched. But the theme of periodic collapse is perhaps borne out by the longer historical record. 
Unless capitalism is overthrown, and private property is abolished, capitalism is about to send us in a new "Dark Age”, as antagonisms create trade wars, protectionism and full-scale military wars. We are dependent on each other, but we are divided by a handful of oligarchs, who don't produce anything but exploit us, grabbing an ever-increasing part of the wealth for themselves, leaving nothing but crumbs for us to fight over.

We will talk more about this in the future, but for now let's get back to the history of money, as gold ("money") has today been replaced by "currency".

Money and currency are two different things - and the fact that most people thing of them as being the same thing is one of the great misconceptions of our time.

When the Roman Empire collapsed, the coins it was issuing as currency had no silver in them (the Romans used silver, not gold). As it has happened many times before in history, gold has today been replaced by fiat currencies. We will discuss the reasons for this in future posts over the next few days.

For now, we will discuss something else:

If today's currency is not money (gold), and there is no gold standard to link these two, then what holds these currencies together? There is not enough gold to back all of them up (at least not in today's exchange rates), so what does back them up?

These currencies are 100% based on faith ("trust"). Faith is always an important factor in capitalism and in the monetary plane in particular, but today's currency in circulation is of value purely because the world believes that they are. If people stop believing that they are "of value", then the value of these currencies will go down to zero. Today's currency is ultimately nothing more than pieces of paper with some beautiful images and the signature of the Trichets and Bernankes of the world.

How much do you trust their signature?

Many say that "gold is a bubble" or "i am not interested in investing my money in gold because i do not want to invest, I want my money to be stable and not having to worry about how my investment will perform".

In reality, these people have no money. They only have currency.

All of humanity is today participating in an "experiment" where we are all investors, even without realizing it. We are by default investing our money in various currencies (apart from all the other investments that someone can make such as shares, etc).

These currencies, like any other investment, can rise and fall - maybe you will make a profit if the currency you use rises, or even completely lose your money (if the value of the currency in which you invest goes to zero (hyperinflation)).

In contrast, gold is money (not currency), and it remains constant. In fact, it is the only thing that remains constant. Its value has never gone down to zero in the thousand of years that it has been used as money, and actually it has not changed much. Gold just stays constant, as a storage of wealth.

As for the value of gold against all the currencies breaking one record after another, it is not because gold is rising, but because the currencies are falling.

So, anyone looking for stability and wanting to protect his wealth, will actually have to resort to gold.

Unfortunately, most people are economically illiterate (the ruling class has made sure of it for it, and the today's "left" has not done much better). This is why most people think that that the currency is what remains constant, and that gold is what is changing. This way of thinking suits the ruling class, which is why they propagate it, as it enables them to steal from people by inflating the currency, without the people realizing it (since in the minds of most people, the currency is stable, and gold is "an investment" that may or may not do well. Most people do not want to invest their money, they just want to store it, so they choose currency over gold, when if fact gold is what they are looking for stability-wise).

Someone could argue that maybe the dollar, the euro or some other currency will actually do well - if they do, then maybe it is better for someone to own currency instead of money (gold). And if the economy is growing, then this is true - for the short term at least: If you decide to invest your money and start a business, maybe this business will do well, and you will become a rich person with lots of money. But what happens if your business does not go well?

“Don’t be a pessimist”, some will say, maybe businesses will do well in the future.

In today's environment however, this is impossible - and here's why:

We have already explained that after the fall of the USSR, and the integration of China in the global market, the productive base of the West is being wiped out because industrial capitalists are fleeing to Asia (mainly because of cheap labor costs which make them more competitive).

The West would have collapsed, if it wasn't for all the loans the banks have been giving out, in order to "mask" the flight of industrial capital.

But these loans can not be repaid, so the West now has a very small productive sector, and it is also loaded with huge debts (and of course the ruling class wants us to pay for them, while they are getting "bailed out").

Since these loans can not be repaid, banks are insolvent (like Lehman Brothers was).

The only way for the global banking system not to go bankrupt, governments around the world are printing massive amounts of "money" (currency), and giving it out to the banks.

This process is possible because there are no limits to the amount of currency that the governments can print. There is no gold standard, so they will print as much as they need in order to save the banks. The banks are their friends, not "the people". So, they obviously have the political will to "print until we run out of paper". The derivatives market alone is worth 700 trillion $ according to Marketwatch, so we will see a lot of "money" printing over the next few years.

But as governments are printing huge amounts of "money", the value of this "money" is falling - this is why gold is making such a comeback after decades of being considered as "a fringe investment"

This policy of unlimited "money" printing is supported primarily by banks, but it is also supported by the industrial capitalists as well, because the more the currency depreciates, the lower the salary of the worker becomes. Thus, labor costs become smaller, and "competitiveness" is restored, so exports rise.

All states want to save their banks and to enhance their exports against foreign competitors - so all states print money. Hence the phrase "currency wars", with each state competing against the others in a game of who will devalue their currency more than their competitors.

But the more "money" governments print, the more people's thinking about them changes.

The U.S. dollar, euro, yen, etc. have value because people think that they do and they use them. But as these currencies are being inflated, people are starting to think that "these currencies are becoming worthless" (and this is why ordinary citizens, and -especially- central banks of the non-Western world are buying gold at an increasing rate - see here, here and here for some examples of this trend).

And this is also why the oil oligarchs who control humanity's #1 source of energy, but are paid exclusively in dollars are against the USA - because they do not want to be paid in a currency when its value is constantly falling (this is why the oil crisis of 1973 happened: It took place shortly after the abolition of the gold standard by Nixon. The oil states did not want to be paid in dollars but in gold. This is something that has to be discussed in more detail in future posts. However, it is interesting to note that Saddam Hussein, Qaddafi and Ahmadinejad were all trying to sell their oil in a currency other than the dollar...).

This process of "moving away" from the dollar as the world's reserve currency (and all the other fiat currencies as well) will continue, as more and more people start to realize that the value of all currencies is constantly falling. So, sooner or later, people will reject these currencies, because nobody wants a currency when he knows that the value of it is constantly falling. Then, there will be chaos as everyone will try to convert all of their currencies to money, ie in gold. [note: Before that happens, we will first witness the destruction of the "paper gold" market that capitalists have created. But "paper gold" is something that we haven't yet discussed, so i'll just leave it as a sidenote for now)

Many riches will be lost (because they is "paper"), while some others who are more "awake" who own gold will escape the real bubble (ie currencies). Gold is the only thing that will remain "stable" when the rest of the monetary system is destroyed and replaced by a new one, in which clearly gold will play a central role.

As for the future of the workers, it is dystopic to say the least, unless they organize in order to overthrow their masters - even if they do find a job, they will be paid in [hyper]inflated currencies (a tremendous reduction in wages).

Of course, the transfer of wealth and power from the U.S. and the West to China, Russia (the Est), will probably not be allowed to continue in a "peaceful" fashion. The U.S. will not fall without a fight, especially since their military machine is the only thing that they have going for them. Wars may be expensive, but they are also the only thing that keeps the rest of the world in place, as all the oil states are forced to use dollars as a "means of payment" for their oil. This is the only thing that keeps the dollar and the USA going (Russia and China are already rejecting the dollar - they are buying gold and they are using their own currencies for the exchanges between them. Even Japan, a traditional US ally, decided to use its own currency in its transactions with China instead of the dollar).