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05 Money

Any class of thing that can be used as a medium of exchange, a store of value and a unit of account such as grain, bread, beer, oil, copper etc., can be used as money, and it is money that significantly advances a society's economy allowing specialisation (the division of labour). Money goes towards solving the "coincidence of want" problem.

Where as simple two party exchange required a bid for something to be combined with an offer of something else in exchange and then the necessity to find a complimentary offer bid pair, with money, the bid and offer can be separated in time and place;
  • An offer of something becomes a bid for money and is referred to as an offer to sell,
  • while a bid for something becomes an offer of money and and is referred to as a bid to buy.
  • The amount of money involved in an offer to sell or a bid to buy is referred to as the price.
Exchange is replaced by selling and buying, which will be called trade.

The individual may sell what they value less in convenient amounts at chosen times and places and use the money to buy what they value more, in other convenient amounts at other chosen times and places. This is the freedom that money offers.

Price

Monetary value is determined by the amount of things on offer for sale and the amount of money bidding to buy them, which does not necessarily relate to the total amount of things and total amount of money in the economy! Price is the amount of money that will be given for something, which depends on the value of the something and also the value of the money.

Trade

With money, the market becomes a pool of bids to buy and offers to sell, every exchange is the two body exchange of something with money.

Imagine the three party exchange example example given above. If the man needing a tool who has water, also has money he buys the tool from the man needing food, who buys the food from the man needing water who buys the water from the who used to need a tool. The money is back where it started but the exchange ring has been completed but as two, two party exchanges for money, a buy and a sell separated in place and time.

In a similar manner money facilitates the fulfilment of high order split exchange rings fragmented over place and time.

Trade Rings

When an exchange ring is fragmented over place and time, then it is called a trade ring so as to distinguish it from and exchange ring where everything must complete at a single place and time. In the end of course trade rings must complete because in the end, things must be transferred in such a manner that value is improved for everybody involved in the ring.

Trade Chains

Any trade ring fragment is called a trade chain. Thus the economy may be seen in terms of trade chains along which things flow in one direction while money flows in the other. When chains link to form rings the money has gone full circle. This is circulation.

Bodies (people and businesses) constantly seek to link up the chains into longer chains as those with money at one end of a chain seek to trade with those with things at the other end of a chain, the result being that eventually chains should link back on themselves completing trade rings.

Money's convertibility for a wide range of things means that finding another link in a trade ring is normally very likely and so it is also likely that the trade chains formed will eventually join with other trade chains or themselves to complete a trade rings.

The Trade Web

Of course just like exchange rings, trade rings can also be split, money can go off in two or more directions to rejoin at some later point but ultimately it must circulate or the underlying exchange rings of the trade ring will not complete.

Balance of Trade

An economy consists of a web of trade rings spitting and joining one another, but one rule results from these rings - Choose any part of the trade web and the amount of money that enters it must eventually equal the amount of money that leaves it, for trade balance to be maintained. Whether that part of the web is a body like you or me, or an economy like the US or China, eventually what we earn and what we spend should be equal i.e. balance.

Liquidity Problems

Even though money provides the liquidity that enables trade rings to complete there will be situations where viable rings will not be completed because there is insufficient money for some transaction in the ring to take place.

Lending and Borrowing

Money can be borrowed to allow transactions to go ahead and be repaid from the resulting benefit of those transactions. There is an obvious risk that the benefit will not materialise. This can also lead to economic problems.

Prices

In an ideal economy once all rings are completed all money should be back with its original owners but this is rarely the case as since fluctuations in prices means money is not always back where it started.

Price

Profit or loss is the selling price less the buying price of things. Recall that the price of something depends on the value of the thing and the value of money to people. There are four factors to profit or loss;
  • Time - things may be more or less valuable at another time.
  • Place - things may be more or less valuable in another place.
  • Amount - things may be more or less valuable in smaller or larger packages.
  • Form - Transforming things may increase or decrease their value.

Time and Price

Reality and Sentiment

When the value of some thing changes it may be as a result of a change of state in the external world or it may be as a result of a change of state of the valuer (i.e. sentiment).

Reality

The price of a fixed valuable will change because of
changes in;
  • the supply and demand for money or
  • the supply and demand for the thing,
here or some place else, now or in the future.

If the supply and demand for money has changed is this because more or less money is available?

If the supply and demand for the thing has changed is this because more or less thing is available?

Sentiment

If not the above then than change in supply and demand may be based on sentiment and needs examination.

1) First order sentiment is expressed by statements like;
  • It will never go down.
  • It is always a good investment.
  • Its on an upward trend.
  • Its on a downward trend.
These statement are statements about the price based on the history of the price often only looking back as far as conveniently supports the argument being presented. These are the real bubble makers because they have no limit, so when a limit is reached it is a surprise for the believers.

2) Second order sentiment includes statements like;
  • Because the population is growing.
  • Because we are going to run out.
  • Because gold is real money.
These statement are statements about real situations but again one must look to see if they have been selected so as to conveniently supports the argument. These are less bubbly because there is probably a sensible limit though what it is isn't clear.

3) To examine fully the situation one must list and consider all the influencing factors and if they can be quantified then they should be. From this one should get some sensible figures perhaps about what the price of something should realistically be.


(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.




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