Friday, November 28, 2008

What is money?

I was asked this rhetorical question in Uni.

"What is money?"

As the recent events about the US dollar has shown. Money is not paper. If a country defaults on its payments, its paper money is worthless.

"Is money gold?"

Maybe I'm a bit sore about getting stabbed on the wrong side of the gold cycle, but I'm rather sanguine about gold.

Let me tell you a story. There was this man who was given three wishes by a magical genie -

So his first wish was to have a ton of gold. He got that.

His second wish was to be in a place were noone else could touch his gold.

So the Genie dropped him into the deepest part of the sea with his one ton of Gold.

The man's third wish- issued more frantically - was to be on dry land.

And so the Genie put him on a small island where there was another resident who owned the sole coconut tree.

The man - exhausted - begged the resident for a coconut. And the resident replied, "I'll sell you one coconut for a ton of gold." The man had no choice but to accept the exchange.

So what is money? Money is value. Paper, gold (and cowry shells) are only a means of helping to exchanging that value.

Food has a value but it is perishable and has a finite lifespan. And depends upon supply/demand.

Gold has a value but it is elastic. Meaning it goes up and down. Its value fluctuates. Gold in 1980 was US$800 an ounce. Since then, its value dropped all the way down to US$250 in 1999. Anyone who invested in gold in that period, lost their pants. Right now Gold is back up again (not taking into account inflation).

You don't have to dig to make money. It can be created through human skill. Ask yourself how much gold will you exchange for a Van Gough or Renoir painting? How much gold will you exchange for a computer or a sports car or a Persian carpet?

Humans can manufacture value. It takes time, effort, skill (resources) and they can build things of value. A Lamborghini sports car. A Nasa sport rocket. A Metropolis. A Railway system. A laptop computer, an internet telecommunication system, etc..

Meanwhile the amount of gold stays about the same. But the amount of value generated by mankind has increased.

cont....







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