Money: Any circulating medium of exchange, including coins, paper money, and demand deposits.

In this piece we discuss what money is, and also money analogs, and make comparisons. We also discuss interest rates as indicators of a healthy economy.

When we discuss money, we discuss what people get for their work. Money is more than a medium of exchange, it is a transferrable unit of work. That is my addition here to that definition. Now, in physics work might be called something a machine does, or what energy can do etc. Gold for instance is directly tied to oil prices because in principle, the work oil energy can do. Hence, oil prices are tied to the king of money - Gold.

I like the definition above mentioning demand deposits. So, a book entry in a bank account such as checking, is a virtual money. These days it's electronic. Do you remember the days when you had a savings account, and when you made a deposit at the bank, they made an entry into your passbook? So the bank had a record and you also had one, only it was on paper. Interesting no? Of course these days, that kind of method is considered archaic. Electronic money is king now, or is it? Isn't it?

The Discussion is about money, not the best version

This piece is not going to be a debate about electronic money or paper money versus gold or silver. This paper will be about what money means, whether it is gold or paper or electronic. And we will discuss the spiritual meaning of what happens when money is abused to people who work for money, and surely for savers who worked for money and saved money and then find its value falling later. In a nutshell spiritually, abuse of money is theft.

We also want to discuss markets and stocks and bonds, and interest rates, in effect allowing people to accumulate other assets, or savings of other people, by borrowing money. That becomes a big rat's nest of skullduggery which the world is now trying to unravel. Read - debt crisis and deleveraging.

What money buys

Ok, so we can agree that money is earned when people work. Also, money can be directly tied to assets such as oil. And money can be used, by definition, to buy things, which required work to make and now we are including natural resources into the picture.

At such a point here, we can then say, well then oil is money? Sure. Although try going to a supermarket and buy groceries with 50 gallons of crude oil...that's a problem.

Ok so continuing, money buys things that require work. But money also is a transferrable unit of work too. That is what makes it useful. Now some people will call me a gold heretic here, but here we go, I submit that paper money is easier to use for transactions to buy things than gold is. So a very important characteristic of money is ease of use.

And in that case, I will go further and say that electronic money is the easiest to use of all. And in a way probably more safe, at least from thieves...certainly a practical consideration... let's be fair here.

But if that is true, that paper money is easier to use than gold coins, which I say is true (as long as the currency is not collapsing!) then the key issue here is not to abuse the paper money. Obviously. Don't print too much. Of course, this is the final end of all paper monies in history, not one to my knowledge has ever lasted for long.

But abusing printing of money (or electronic printing) is more of a political problem than an intrinsic problem. Of course, you can codify money as only gold and silver coin, but governments rarely hold to that. You know that.

So. Recapping so far:

  •  Money is (or represents) a unit of work
  •  Money must be easy to exchange
  •  Money must not be abused by printing
  •  Gold money is hard to abuse but not necessarily easy to use
  •  Money must be acceptable to buy things and also to pay off debts denominated in that money.

Bankers, stocks, and bonds

Now we get to the interesting part of this article. When we discuss banks, stocks, and bonds (borrowed money as well basically here) and interest rates, things get much more complicated. The potential abuses of money are exponentially increased by these more or less money vehicles/analogs. Crooks take great advantage of these potentialities. A dishonest bank or brokerage can really harm people's money. Take a look at the debt crisis in the EU and see the damage it did to the job markets there...just as one example.

The possibilities to abase a currency are basic. It is one thing to abase a currency, in ancient Rome's case, by adding base metals to the silver coin. It is also one thing to abase modern paper money by printing more of it. The potential for abuse is rather basic there. In both cases the value of the already circulating money is reduced. Simple.

Moneyness of a stock

But let's look at what stocks do for example. A stock is a claim on the income producing capability of a company, as well as its assets, and even bank accounts. A stock is a very complex money analog, or rather thing of value. Stocks have moneyness by being priced in stock exchanges. The value rises and falls based on bids each day...But fundamentally, a stock is a claim on income that the company can make each year. Stocks are based primarily on earnings projections. Being a claim on earnings is like money in a real sense.

One thing that I personally don't like about stocks is that stock exchanges and brokerages constantly equate stocks with money. They say your account balance is worth X dollars for example. People read those statements and think they have money. But that is vacuous. The objection here is not that that value is not real, but that it is very transient, and especially in cases of stock crashes - stocks are NOT very good money! You should NOT equate a stock portfolio with a savings account.

One more point before we move on. If I was to pick a stock that is perhaps the best 'money' stock, it would be a gold mining company. An unhedged one preferably. Homestake mining did really well during the Great depression of the 1930s while the general stock market crashed 90 pct.

Now also, a good tech stock with rights to technology is very real too. Microsoft products are money -perhaps the most reliable income producing stream on the planet for example. And I would consider that a money stock as well. And also a good oil stock but oil as we mentioned is too hard to buy things with... it gets messy here. As I stated, once you get to stocks as 'money', things get messy and complicated very fast. People need to understand that stocks are NOT very good money, nor to save in, unless the economy is growing.

But these days the economy is shrinking with the retiring baby boomers around the world, not only in the US. So, really long term, stocks are not nearly as good as savings as they were say 20 years ago. But brokerages certainly won't talk much about that little detail about our present world demographics. But let's not digress too much. Remember money equates with work and income.

Bonds and Savings

Bonds are only as good as the income they produce. And savings accounts, which you might consider as loans to banks, are only as good as the bank (and or deposit insurance). And interest rates determine the health of savings accounts and also bonds, and also the economy in general. This is a key idea for later in this paper.

Healthy interest rates

In history, if you look back at interest rates and the economy at the time in that particular country, you will find a most interesting fact. In good stable economic times, no matter what the civilization, the healthy interest rate environment stabilizes at 6% per annum. I suspect this is a biological result of a human generation being roughly 20 years to reproduce. But let's not get too sidetracked.

Interest rates determine the health of money.

This can be traced back thousands of years. When interest rates hovered around 6%, and were stable that way, economic times were good. People had jobs and saved. Capital was saved up and put to use. Money was not borrowed for everything... people paid cash. They effectively SAVED 6% cumulatively for each year of their entire gross income...compounded by NOT borrowing! Do that a few years and you soon have twice as much wealth, things, and or savings in ten years than you would have by borrowing money...In any case, I am trying to show you why that 6% interest rate was a key to a healthy economy...when interest rates are much higher than 6% that means there is either a speculation bubble or a debt crisis. When interest rates are much lower than 6% that means the economy cannot produce income because income opportunities compete with savings.

Money concentration and wealth concentration

It is an economic fact that when too much wealth is accumulated in the hands of a few, the lack of money in the economy causes deflation and economic collapse. Deflation by definition is a lack of money in the economy. When too much money of the nation is accumulated or sidelined by wealthy individuals, who just cannot spend it, deflation sets into the economy. Excessive wealth accumulation has been proven to be a primary cause of economic depressions.

So is savings bad? No. What is bad is when too much savings is accumulated by a few. That is what causes depressions...and wars by the way...let's not digress too much here.

Interest rates and money savings

To figure the value of a savings account, one really needs to refer to the interest it can earn in a year. A million dollar (USD for example) savings account is just not worth as much when a year CD earns 2 percent per annum, as when it can earn 6 percent. That is plain right? (I am not discussing here the inverse relationship with bonds rising in price when interest rates are falling. That is another issue. That is people chasing yield. Again a sign of an unhealthy economy that can't offer income alternatives).

So, even though savings are good, when interest rates are low they are not that great. So the moneyness of a savings account is not as good in low interest rates. IE savings are not worth as much. But in the healthy 6% times, they are fantastic (I am not including an inflation calculation here, so as not to get too complex, if inflation is high, you have to do an inflation adjustment upward to find the real rates...blah blah, let's just keep things simple and exclude inflation so we can just stay talking about interest rates and the key 6% health level and not have to adjust everything constantly for sake of discussion for now).

Interest rates reveal a lot about the economy

Since money is the ultimate exchange, for work or things, interest rates for savings show a lot about the health of the economy... let's take a look at a very revealing chart about US T rates, again, I am not going to address the inflation issue quite yet for simplicity.


US T bonds are considered very money like. Hence this chart. Of course these days that health of US debt is very debatable. But let's talk about this chart.

So by definition, the value of US T bonds is based on their income producing stream...which in healthy times is around 6%, and notice during the housing bubble, the yearly US T rate was about 5%.

Then the Bear crisis in 2007, and the Lehman crisis in 2008 blew things wide open. And of course, US interest rates were dropped below 1% to fight that bank crisis by hopefully stimulating the consumer economy. That did not work. Interest rates are still at below 1% for a one year US T.

Few opportunites for income

This chart also shows that the value/demand for the USD is higher as demand for US T bonds is high and markets tolerate those low interest rates...for now. In other words, there are so few opportunities for income to be found out there, that people with lots of savings (or whoever) will accept these ridiculously low yields. Believe me, if the prospects for the US stock markets were better, US interest rates would be higher. But the bond market is heavily competing with the US stock market, evidently because people think US stocks don't have very good multiyear prospects for earnings growth. So they accept these low interest rates.

Not to mention the fears of a world bank crisis and stock crash! Low interest rates like this say the moneyness of stocks is pretty low! A lot of good stock yield is if the stock price crashes...This chart states that cash is what is important now, IE liquidity and savings. When income prospects for a company or person are low, savings is what matters. The longer these low rates persist the greater the risk of a huge US stock crash. If corporate incomes show any sign of falling, look out below!

 Of course, gold is also increasing in price, market gyrations aside. That too suggests that the value of money is rising. That is a result of deflationary forces. This happened in the 1930s as well. As cash was king then...

One might well ask why, if the US is printing money like mad, is the demand for USD high, but the economy is falling? Because all that money printing the US and other central banks did was sunk into a debt deflationary black hole, and never made it into the economy! And central banks cannot produce income. They cannot replace the economy. They are merely trying to hold up the value of sovereign bonds and the banks. So while interest rates are low, the central banks are trying to pay the former higher yield on bonds! Otherwise nations are going bankrupt in the EU for example, and then the banks there collapse...this is a real problem.

The central banks are trying to defend the moneyness of EU sovereign debt and that is failing. I suspect we are setting up for one monster world stock crash accompanied with bond crises and bank and currency collapses. That is one conclusion we can make here....

I was going to include some discussion on bond yields in more depth and sovereign bonds and electronic money, but we are getting a bit long for now.

Anyway, I hope that you benefitted from our discussion about money and money analogs, and how they relate to healthy (and sick) economies.

Copyright 2012

Chris Laird

Editor in Chief

Chris Laird is a mathematician, Oracle systems engineer, and publisher of the PrudentSquirrel newsletter.

Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.

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