The question around money permits a variety of interpretations as the relationship each individual has towards it, is partially subjective. However, looking at money from the standpoint of physics and the philosophy of praxeology (study of human action) captures the essence as well as the objectivity of money. Thus, money is socio economic energy that holds value through space and time.
Each of us has to expand our limited time and resources just to receive enough energy to stay alive and for working individuals a compensation is given for the valuable sacrifice of our energy through the use of our musculature and/or cognitive function. Thus, it can be said that money is an index of value that measures what each of us brings to the economic table. Put differently, the money we receive for our labour, capital and/or rent proxies for what we bring to the marketplace although granted others reap more than what they have sowed through means of cohesion, oppression, discrimination, theft and other negative externalities.
However, the point of this article is not to argue about what should be the just wage for our labour or the just rental rate for capital, but it is to argue that digital property may be the best technology to hold the value of sacrifices. This finally brings us to the second reason of why it is important understand what money is and that is the technologies we have developed throughout history to represent and hold value are defective. These technologies that are implemented to hold value are defective in the sense that they lose value through space and time. The most defective being currency by fiat. Elaboration on this second point is spread across below as I investigate alternative instruments that may hold value.
Before jumping into the instruments designed to hold value it is necessary to mention the five properties of money. These properties are:
The properties represent the intersection of the space and time dimension for money, where the first four properties are weighted towards the space dimension and scarcity towards time. To borrow from the Marginalist School of thought, economic value is not only derived from labour, but it is found in scarcity. Thus, with the final property of money there is an implicit social contract that whatever instrument is used as an index of value should be scarce today and shall be scarce tomorrow so that the sacrifice of our energy today will still be valuable tomorrow.
Over thousands of years, gold has been the best idea for money that the human race has created, (Saylor, 2022). Gold has intrinsic value not only because it satisfies most of the properties of money, but gold also has industrial use. Outside of being a means of exchange of one form of energy for the other, gold is a durable dense metal that is malleable, ductile, conducts heat and electricity well and thus makes it a desirable metal for productive enterprise, not to mention its aesthetic appeal. Gold however is cumbersome especially for large transactions and as such the portability property is not well satisfied by gold, it also presents problems with regards to storage. Gold is a defective technology because its scarcity property is undermined with each unit that is mined, 1.32% to 1.58% of the total above ground stock of gold gets mined each year. Thus, all things being equal the half-life of gold is 53 (70/1.32) years or 44 years. In other words, if we store the value of what we earn in gold then in about two generations half of it would be gone.
Property, Equity, Debt and Fiat Currency.
For the sake of brevity, the rest of the technologies that can serve as a store of value are bundled into one subheading. They are also very interrelated which makes the bundling justifiable. First, property can serve as a stable store of value however the housing market is also subject to booms and busts. Prior to the 2007/8 global financial crisis, the housing market saw a soar in prices, this gave the incentive for a greater supply of housing infrastructure. This is the easy money trap, when the cost of producing something that stores value is less than the going market price than those that can produce will flood the market with it until it is not profitable to do so. Like most things, property is also subject to the second law of thermodynamics, entropy also known as depreciation. Thus, property is defective in three main ways through the easy money trap, through deprecation and finally property-taxes.
Equity as a store of value is defective due to the incentive to issue more shares when its share price is above the fundamentals. Private equity has less liquidity than the publicly listed equity, although public shares are defective in that they necessitate the proprietor of the shares to gamble on what the market sentiment will be at a future date so that the ownership of the instrument is viable as an investment vehicle. Debt in the form of bonds is closely related to equity but bonds can fall into traps, an easy money trap, when the interest payments to bondholders is low enough to incentivise a greater issuance of bonds. Secondly, a liquidity trap, when consumers believe that the price of bonds is going to decline so they would therefore choose to hold cash in the interim.
Fiat currency is the most defective of all the listed technologies because it can be artificially inflated by the state or the central bank. The 2020-2021 M2 money supply in the United States was 27.6% , to put that into perspective it’d take you less than 3 years for the money in your account to be worth half of what it is today.
Digital property in the form of Bitcoin has none of the defects mentioned above. It satisfies all the 5 properties of money, more specifically the scarcity property. As the supply of Bitcoin is limited to 21 million and its consensus parameters limit its periodic supply on the network. More shall be elaborated in future articles on this point.