Sunday, October 2, 2011

The Rules of Money

I’m going to say at the start of this post that I’m no financial expert. However, I can see some basic things very well. The basic things I see serve me very well and often enough when things are going very bad one of the basic principles has to be out of whack.

There is a lot of attention in our world being paid to the subject of money. I don’t know or care to comment on what other people think of the stuff but I can observe that there is a lot of confusion regarding it. What is it? What gives it value? Why do so many people depend on it? Why do so many people expect to get it for nothing? Why do so many other people think that other people have gotten it for nothing?

I often tell people that the best way to separate a rich man from his money is to sell him something he needs. In that spirit, I have written my own set of rules and understandings of money.

Some of these rules overlap quite a bit, but as such, each one expands on the others and depends on them as well.

1.      Money is of itself worthless.

Yes, that’s what I said. Money is worthless. A lot of people look at me kind of funny when I say that but it is apparently true. Let’s take the character Tom Hanks played in the movie “Castaway.” Suppose the crashed airplane would have been carrying huge bails of money, which washed up on the beach of his little island. Would that money be worth anything at all to him? He couldn’t buy anything with it could he? The most he could do with it that would be of any value would be to burn it to stay warm.

My book, “Vengeance” is not worth  the cover price of $16.95. The cover price of $16.95 is worth my book. The value is not carried by the money. It’s carried by the book. That is to say, the book gives the money its value. If this confuses you or goes against your understanding, I urge you to think carefully on the next couple of rules.

2.      Any value money has is an apparency derived from the considerations of the people spending it or receiving it.

Look at the financial websites from day to day and you will see a thing called the “Dollar Index.” From day to day the value of the dollar is tracked, from day to day the value of the dollar changes. If you study the numbers for a while, you will realize that nothing changes this value except that people think the value of it is changing. Prices of things go up and they go down. All that has changed is the consideration that the value of the money has changed.

3.      If you understand the considerations of people, you can understand money.

Since the value of money is based on what people are thinking if you understand those thoughts, you will understand where the value of money comes from. Here’s a hint; people are trying to survive!

4.      The considerations which give money value are:

a.      The considered survival value of the product exchanged for it. (demand)

This depends a lot on the circumstances of yourself and the world. Let’s take the “Castaway” character again. Suppose the bails of money on the beach counted out to a hundred-million dollars. Would he have paid the whole hundred-million dollars for a single solar powered satellite phone or would he have held out for a better price? That’s not a high valued phone. It’s low valued money because of the survival value of the phone. When he gets back to civilization, the phone might be worth a couple hundred bucks because its survival value has changed. Bail after bail of the money could wash up on the beach and it would only be a source of fuel for heat on a chilly night. The phone however is freedom!

b.      The number of people to exchange with.

You can’t have money or make money unless there is somebody there to trade the money with. This would be a lack of customers in your store. Just like our castaway, there is nobody to give the money to in trade for the product or nobody to take the money from in exchange for a product. Therefore, money without people is worthless.

c.       The supply of product to be exchanged.

If you were a chicken farmer and had ten times as many chickens as you could afford to feed you would lower the price of the chicken you were selling before they ate you out of business wouldn’t you? This raises the value of the money because now the customer can buy more chickens with it.

d.      The supply of money.

Let’s do a little mental exercise for this one. Let’s imagine that you’ve got a house with three large extra rooms. Imagine those rooms filled with bails of hundred dollar bills. Now fill half of the remaining rooms with hundred dollar bills, so much so that it’s difficult for you to move about the house. Now fill the basement and garage with hundred dollar bills. Now have the back and front yard filled with hundred dollar bills piled up to ten feet high. Now imagine all of the yards of all of the houses on your whole block filled with bails of hundred dollar bills. Imagine that the whole world is totally awash with bails of hundred dollar bills piled ten feet deep. What’s that money worth in your mind right now? It's just litter that is worth just a little bit more than the Zimbabwe one hundred trillion dollar bill, which by the way, really does exist.

Now imagine you have only one dollar. There is our chicken farmer in front of you with some chickens he’s willing to sell and you are negotiating the price of the chickens. That is the only dollar you’ve seen in a month. Your child is standing there next to you and is hungry. What’s that dollar worth? If you said, "as many chickens as the farmer would sell me for a dollar," you've got the idea.

5.      The survival value of products is one of the most important considerations concerning the value of money.

Continuing with our previous scenario, that one dollar would be worth all of the farmer’s chickens in your mind, or at least enough to feed your child until you can find another dollar wouldn’t it? And if the farmer agrees that the dollar is worth five chickens, it's worth five chickens. If the farmer agrees that it's worth one chicken, it's worth one chicken.

6.      Scarcity of survival-valued products always equals desperation, because of this; excessive need lowers the value of money.

If it’s been a month since you’ve seen your last dollar and you don’t know when your next dollar is coming you’ve likely been short on food for a while. Look at this though; you will likely take as many chickens as that farmer will sell you for a dollar wouldn’t you? Hopefully he’s got too many chickens and is looking to get rid of them and so you will get more for your dollar. What if he doesn’t have a lot of chickens though? What if his family is hungry too and they’ve had to eat their stock just to survive? You won’t get many chickens from him. Therefore, your dollar isn’t worth as much to him is it?

7.      Time can be a survival value product so paying interest on a loan is buying time.

You want the house right now. Your family needs a place to live. You only have half the money you need for it so you go to the bank and borrow the rest at five percent. If you would have been able to save the rest of the money in ten years to pay for the whole house at once you could consider yourself to have bought ten years of house for five percent interest.

8.      Above the minimum survival level of prosperity aesthetics and entertainment can enter in as a survival consideration of a product. This is why people buy art and jewels, etc.

So things have been going well. The house is caught up and ahead on payments. The cars are running fine. The kids are fed. You are several paychecks ahead in your bank account. Why not go see a concert? Take the kids to Disney? Buy a big-screen HD television? Or a diamond ring?

9.      The amount of money in an economic system has to be close to the amount of valuable product in the system or the value of the money will inflate or deflate.

It’s just as bad to have too much product with no money to exchange for it as it is to have too much money and no product to exchange for it. The happy spot is in the middle. There aren’t too many or too few chickens. There isn’t too much or too little money. If both of these conditions are true values of them both would remain stable.

10.  People who have a lot of money spend a lot of money. Their spending a lot of money causes other people to have a lot of money to spend. This is how an economic system is perpetuated.

Look at rule #8 again. You are several checks ahead and bought a brand new HDTV. The guy who sold it now has money. He can now go out and buy that new car he’s been needing, assuming enough other people have bought HDTVs as well. So he does. The guy selling the car bought it from the guy who made the car. Now they can take the kids to Disney.

So what if Big Mister Gotbucks wants to buy fifty-seven yachts? He has to buy them from somebody doesn’t he? The guy he bought them from had to build them didn’t he? The materials he built them with came from someone didn’t they? Somebody has to maintain them and crew them don’t they?

Even if Big Mister Gotbucks doesn’t want yachts he’s not usually going to keep all of his money in cash under his mattress is he? No, of course he isn’t! He’s going to put it in the bank to lend to you so that you can build your house ten years earlier. Well somebody has to be paid to build your house don’t they? They have to buy the materials from somebody else don’t they? Great! Now he can afford to take his wife to the Rush concert and watch Geddy, Alex and Neil play “The Big Money” so they can pay the people to set up their stage for them who in turn can take their kids to Disney or buy an HDTV.

11.  The apparent amount of money a person, business or economic system has can be increased by the velocity of the money moving in and out of it, or within it, without needing to increase the amount of physical money.

Let’s say I make tens of thousands of dollars a year. Yet very rarely do I have tens of thousands of dollars on me. So if I had ten thousand dollars and spent them all, soon after which I got ten thousand more. Then I spend that. I would have made twenty thousand dollars right? Okay what if I did that ten times a year? I would have made a hundred thousand. What if I did it a hundred times a year? I would have made a million dollars right? Well what if I did that ten-thousand times a year? I would be rubbing elbows with the likes of Bill Gates wouldn’t I? However, at no time during this whole thing would I have more than ten thousand dollars!

That’s strange isn’t it? It’s not an amount of money it’s a velocity, how fast the money is moving from hand to hand. It could be the same ten thousand dollars moving into and out of my bank account ten thousand times and it wouldn’t make a bit of difference would it? My account would show that I had made and spent a billion dollars in a year.

One thing to keep in mind here…if money is taken from Big Mister Gotbucks through too much taxation it slows the system down and thus reduces the amount of money in the system. While some people might think this is a good way to compensate for their irresponsible spending, what it really means is “No Rush concert for you!”

The moral of the story is, “Don’t bash someone who makes a lot of money for the money that they make. Look at how much of it they spend and thank them for doing so!”

12.  Any money that is transferred without an adequate an exchange of product has less value and will tend to destroy an economic system.

Let’s suppose I walked up to and handed you a hundred dollars for nothing. Then you hand it so someone else for nothing. Then he hands it to someone else for nothing. What is that hundred dollars worth? Nothing, of course! So supposing on a larger scale everybody in the world gave all of their money away for nothing and received nothing in return for it. What would the world have? Nothing, of course!

It would be a lot like our castaway stranded on the island with bails and bails of money except this time he’s with a hundred other people. They could trade the money all day long and never buy anything of value. There’s nothing there to trade it for!

So if a government prints, and prints, and prints, and prints, more and more, and more, money then gives it away in exchange for nothing, what does that do to the value of the money?

13.  A person has to contribute survival value products to an economic system to consider himself to be of value.

People who are given money for nothing over long periods of time consider themselves to have no value to society. Look at the areas of any country where welfare has been a family tradition for several generations. Talk to them for a while about things they might do to change or improve their lives and count how many times they answer with the words, “I can’t…” or something similar. They’ve lost their ability to create a product which they can exchange for money, even if it is their own labor, and think themselves worthless. People who have been treated in this manner for a long time are a liability to have around you.

Look at it this way…the money flows from a place of value to a person who has nothing to give in exchange for it. Over and over again, year after year, value to nothing, value to nothing, value to nothing. It’s a very short leap from “I have nothing of value to give” to “I am nothing of value,” isn’t it? After a while, that’s what the person receiving the money thinks he is. Nothing. Why should nothing care about something?

14.  Any survival products which are transferred, in excess, without the exchange of money, which was earned through the production of other survival products, are considered worthless by the receiver. These products will likely be unappreciated, taken for granted or destroyed.

Let’s look closer at the welfare state as in #13 above. I urge you to take a close look at the neighborhoods that were paid for by welfare checks. Is anything there well maintained? Look at the welfare apartments, projects and such. They aren’t just run down. They are overtly or covertly destroyed. Graphitti , litter and piles of junk abound. That stuff doesn’t just spring up from nowhere; it has to be put there by somebody who doesn’t care. Nobody owns them, nobody has worked for them and nobody considers them to be of value. As a result, that is how they are treated.

These are high crime areas and no amount of money thrown at them is ever going to change that. It will make it worse. These areas happen because of the basic misunderstanding of money in society. The thought that the money is the value, is the problem. The thinking that all you have to do to improve the value of something is to put more money into it is false. You don’t add value to something by putting in more and more money. You add value by increasing the ability to get products out. If you can arrange the area so that something productive comes out of it, money will flow into it, almost of its own accord.

15.  Scarcity of money in and of itself does not equal desperation.

If you had no money and had not eaten for three days and somebody gave you a ten-dollar bill the first thing you would do is get rid of the money and get some food. It’s not the money that causes the desperation it’s the lack of food. If you were the chicken farmer and raised enough chickens you would never worry about buying them would you? No matter how little money came in you could still find food. There would be no need for money if you could create everything you needed and wanted for yourself.

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