The (Unholy) Trinity Of Money: Holy Smoke!

Money as religion?  Well, of course, since modern money is all about faith (lat. credo > credit) imposed by fiat (therefore, fiat currency).  Therefore, it strikes me as very funny that money exists in three concurrent states, just as Christianity has its own holy trinity to make up one god.  (If you are more scientifically oriented you may also draw a parallel with the triple point of water.)

Let's see:

• Money is a medium of exchange for goods and services.  This function of money is the oldest and most important in our daily lives, at least for the vast majority of us (see further below why it's not so for everyone).  Money-as-go-between goes back thousands of years to Mesopotamia and is at least as major a human invention as the written word and the wheel.  It greatly facilitates the smooth functioning of the barter part of every economy, allowing for the formation of cohesive societies.  It really does not matter what "money" is, as long as everyone agrees to a common convention and it has an element of scarcity.  Cowrie shells, salt, stone tablets, precious metals.. all can and have been used as money in the past. This is the state of money that everyone understands, even a six-year old.  Let's call this the Father State.

• Money is a storehouse of value.  This state came relatively quickly after money became widely accepted and circulated.  The Athenian silver owl was probably the world's first global reserve currency, right around the fifth century BC.  In this state, people accumulated money instead of valuable resources such as food, fuel, livestock or land.  They did so because money was easier to store (e.g. in a small strongbox instead of earthen jars full of wheat) and - very crucially - because they believed they could readily exchange it for valuable goods and services with minimal, if any, loss.  In simple terms, a silver coin minted by Athens was assumed and expected to always be exchangeable for a given quantity of wheat or timber, all other things equal.  This is when the concepts of inflation, seigniorage and debasement came into play, followed by monetary imperialism in the heyday of the Roman Empire.  Most people are familiar with this state of money, too, because they are still mentally stuck with popular images of vaults full of gold backing our money (it's not true).  Let's call this the Son State.

• Money is an asset.  An asset is something that produces regular, periodic returns: a piece of land   tilled or grazed by animals, a herd of domesticated animals, equity in an operating business that produces valuable goods and services, etc.  However, the concept of money itself as  asset (i.e. debt which produces interest), was not widely accepted until quite recently.  In fact, the world's two major religions, Christianity and Islam, considered lending of money at interest a major sin (Islam still does, even if only in theory).  This is money's most pernicious and least understood state, completely ignored by the vast majority of people.  Therefore, let's call this the Holy Smoke! State.  (Aptly enough, water also has a vaporous state.)

I obviously don't have a problem with money's Father and Son states, but Holy Smoke! gives me the willies.  How could money possibly be an asset, for example a bond?

Consider: a government issues an interest-bearing bond denominated in fiat money.  Ignore the principal for a minute, let's just assume it keeps getting rolled over at maturity.  But what about the regular, periodic interest that asset-holders demand?  Where is that going to come from, huh?

We have become so accustomed to such illogical nonsense for so long that we have come to think of  money-as-asset as common sense, day-to-day reality.  But if we stop and really think things through we come to the inescapable conclusion that we are dealing with smoke and mirrors.  Holy Smoke! by golly!


I previously said there are people - a class of people, really - for whom money as a medium of exchange is not very important.  What I meant is that there is a small minority of wealthy rentiers of Holy Smoke!  for whom the other two "states" of money are almost entirely insignificant.  Another way of saying it comes from Wall Street's past: Gentlemen prefer bonds.

As things have developed lately it is this small minority that is calling the shots for everyone else, i.e. the finance tail is wagging the entire economic dog, now more than ever before.  The borrow-consume-grow economic model that was espoused - and is still espoused in the guise of government "bailouts" - led to such an explosion of debt world-wide that Holy Smoke! is now the only form of money that really matters, the state that calls the shots, if you want.

This is completely unprecedented in economic/monetary history.  It is even entirely wrong to compare today with the Great Depression and to attempt to draw parallels, examples, lessons or possible solutions from it.  This is a new reality, so new as to have become invisible to politicians and economists who operate under the principle that if you can't "see" it, it doesn't exist.  (To be fair, that's how most of us operate day-to-day, anyway.)

And here we are today,  just like the Easter Islanders refusing to accept that building ever more stone edifices to our own Holy Smoke! deity does not constitute a real solution.

Moai In Easter Island