This is Part 4.
In Part 1 – The Truth About Money – We discuss the properties of Money and explore why Money should be considered debt.
In Part 2 – The Death of Capitalism and the Rebirth of Religion – We discuss how society is rejecting the long-established rules around Money (and Capitalism) and why that will usher in a new era of Religion.
In Part 3 – Money in a Diverging World – We examine how the current geopolitical conflicts in Europe and Asia are interesting case studies to explore the ideas we have discussed around Money, Capitalism, and Religion.
In Part 4 – The Issues With Capitalism – We discuss the issues that Capitalism is already facing before the coming challenges in an era of Religious ascendence.
Before I dive into this piece, I’ve come across a very compelling documentary about the concept of Money as Debt.
The documentary was published by Paul Grignon back in 2006 with subsequent updates in later years. Paul has discovered some of these concepts almost two decades earlier (and perhaps others may have gotten there even earlier)…
This serves as a reminder that few things under the Sun are truly new. Humanity is constantly discovering and rediscovering things that were already known – perhaps just momentarily – before being drowned again in the tsunami of time, waiting for the right place and right time to surface again.
Money as Debt Part 1:
Money as Debt Part 2:
However, the videos describe the concept of Money as Debt primarily in the context of banking debt…But that’s too narrow.
Instead, the point of this whole series of notes is to propose a much broader definition (as introduced in Parts 1-3): Money is not created just through banking debt…Money is debt, and all debt and all promises can result in the creation of Money. Banking / financial debt is simply one version of Money…Money squared…an exponential promise…a promise on top of a promise. Paper money is just one form of Money, but those that can control, direct, and issue promises in all its forms will move the world.
All Money begins with a promise: If I do something for you, you will do something for me.
How you choose to represent that promise doesn’t matter. It can be green paper. It can be red paper. It can be rocks. It can be shiny metals like gold. It can be digital bits like Bitcoin. It can be anything.
All that matters is that the parties involved all agree that the Money – no what is chosen to represent it – carries a promise to repay a Working debt: If I do something for you now, you will give me something that allows me to ask you to do something in the future.
The value is in the promise, not in the item representing it.
And Capitalism is simply the system that allows you to exchange these promises for things that you want. Society is obligated to honor these promises because you’ve already done the Work for Society to earn those promises. Society has an obligation to honor these promises, and doing anything otherwise would be nothing short of a default.
Textbook examples always paint Capitalism as a win / win, and in many ways it is.
A chef knows how to make tasty meals very quickly but might not know how to farm (efficiently). A farmer may know how to produce a lot of ingredients, but may not know how to turn it into a (tasty) meal. And both the chef and farmer has too much of what they make! Trading improves both situations. The farmer gets a tasty meal, and the chef gets the inputs.
Such a system obviously could work through direct bartering.
But the magic of Money and Capitalism is that it allows you to do this on a much grander scale.
No longer are you confined to bartering amongst people you know and trust, you can trade village-wide, city-wide, nation-wide, world-wide.
People do not need to know much about you or trust you for this system to work. As long as you deliver the Work (products or services), you don’t need to trust that that specific person will pay you back with future Work…you only need to trust that the Money and its implicit promise can get you what you want from someone in the future.
But despite these sunny, rose-colored examples, Capitalism doesn’t seem to work as well in the modern world.
Why is that?
Even before we re-enter a world dominated by Religion in the coming years, the fact is that Capitalism was already mutating.
Capitalism works best in the real world involving goods and services.
When you walk into a store and you want to buy something, there is no ambiguity about what you are buying and the number of promises the merchant gets in exchange.
Transactions do not happen unless both parties agree that it is favorable for them. A transaction only happens if you value the item at least as much as the Money you are giving up, and the merchant must value the Money they are receiving at least as much as the item they are giving up. If an exchange happens, both parties are better off.
Not only does it have to be favorable for each party, both parties generally agree about what is exactly being sold. There must be no ambiguity about what is being sold. If you walk into a store and want to buy a banana, getting anything other than a banana is a problem. If you walk home and discover your banana is actually a cucumber, the merchant has an obligation to fix it.
In the real economy, there is generally no ambiguity about what is being sold. When you engage in a transaction, you know at the point of transaction whether it is good for you or not.
A key complication is that the real economy has been subsumed by a much larger financial economy.
These include obvious financial instruments and markets like bonds, stocks, and derivatives…but there’s a whole broader financial economy now including casinos, sports betting, and crypto.
In common language, we equate all parts of the economy with Capitalism.
But the rules that govern the real economy and the financial economy couldn’t be more different.
In the real economy, transactions are never ambiguous, and transactions only happen when both parties end up better off. This means the more transactions that happen, the better off everyone will be.
Unfortunately, this is not true in the financial economy, and this is the primary source of tension that is pulling at the very fabric of Society today.
In financial markets, participants transact and exchange things not unlike in the real economy.
However, in financial markets, every instrument that you trade is ambiguous in nature.
By definition, the buyer and seller of financial instruments almost NEVER agree on what is being exchanged. This is because the value and payoff of all financial instruments are only knowable sometime in the future, but almost NEVER at the time of the exchange (except for certain special situations).
Buyers always think they are screwing the seller by getting something more valuable than the seller knows, while sellers always think they are screwing the buyer by getting rid of something les valuable than the buyer knows.
In the real economy, transactions are always win / win.
In the financial economy, both parties think they are better off at the time of the transaction, but in reality one party has won and one party has lost…except no one knows who the winner is until some time later.
I don’t think it’s a stretch to say that a whole world running this way is probably not ideal. A fully financialized world isn’t unworkable, but it probably introduces more uncertainty and volatility into the world compared to a world dominated by real economies.
Yet, this is increasingly our reality.
We live in a world where the financial economy is already far larger than the real economy.
Nonetheless, it is important to acknowledge that financial markets are necessary and are a net positive for Society even if it creates winners and losers out of all of us.
Bond and equity issuance play a very important role in financing new and existing companies. These companies play a critical role in driving competition and experimentation, two key factors necessary for Societal Progress.
In many ways, the financial economy is a necessary evil.
Secondary trading of financial assets creates winners and losers out of all of us and introduce unnecessary volatility into the world, but it is a necessary evil in order to accelerate competition, experimentation, and Progress in the real economy.
But as with all necessary evils, perhaps we should strive to only do as much as necessary.
Increasingly, we live in Societies where people view financialization of everything as an unqualified (or at least neutral) good.
Like sports betting:
Like “investing” (read as: speculating) in events:
Like “investing” (read as: speculating) in people (Coinvise allows people to issue tokens of themselves):
And in many ways, like investing in crypto. Although there are many crypto projects that do aim to create real world value, there are also many crypto projects that simply aim to turn concepts and ideas into tradable assets without ever likely creating any real world value.
Financial markets are an important tool for making the real economy better.
But whether we make bets on:
…or, this week’s top song:
…or, the timing of the next moon landing:
Because in financial markets, there are ALWAYS winners and losers. Financial markets make winners and losers out of all of us.
We still refer to this as Capitalism, but there is no doubt that the greatest kind of Capitalism is the win / win kind.
Back in Part 1, I noted that once you come to understand that Money is debt owed to productive people, you can start to see why wealthy people have a hard time understanding the dislike they face…they’re rich because they’re productive!
Leaving aside the many ways that people can earn Money through dishonest means (which society should absolutely crack down on), the anger towards people with Money appears misplaced when one understands that Money is debt.
If someone has a lot of Money, this means the person already provided a lot of goods and services to society and others without receiving anything in return yet…other than these little pieces of IOUs called Money. The Money is nothing more than a pile of debt that society and others have promised to eventually repay with goods and services. Wealth is a polarizing issue, but through this lens, it’s easier to understand why some people with Money feel that they are getting less out of society than they have put in, especially when society shames them for having so much Money (despite this being a result of never collecting on that debt by spending it).Source: The Truth About Money
In recent years, this displeasure isn’t even isolated to truly wealthy people (perhaps we can draw the line at billionaires easily). Many people in the middle class (perhaps coming from professions like medicine and law) face the same ire.
But there are also good reasons why this displeasure exists, and understanding the true underlying nature of the problem is a necessary and important step to address it.
One of the issues is that in a financialized world that is evermore financializing, you can become really, really wealthy really fast without ever having create much real world value.
I can think of many examples, but naming names would not be in particular good taste.
However, a very straightforward example that I hope is not particularly controversial would be Elizabeth Holmes and Theranos.
It’s clear that Theranos never had a working product and may have actively put people at risk, yet the company was once valued as much as $10 billion, making Holmes a billionaire.
Money is a promise worth honoring because we assume that the Money people have is earned through hard and useful Work.
However, in a rapidly financializing world, increasingly many people can have a lot of Money that is not earned through Work that Society might value.
Perhaps you simply guessed yesterday’s weather correctly or guessed last week’s top song correctly.
It’s one thing to repay a debt for Work that was already done for you. It’s entirely another thing to be obligated to repay a debt to someone that has not done real useful Work.
I leave it up to you, the reader, to think through the issues of large inheritances where inheritors can end up with large fortunes without having done much useful Work. And this fortune – this Debt – is an obligation that Society must repay.
Another issue is that Capitalistic trade is not always symmetric.
Going back to our simplistic chef / farmer example, the chef depends on the farmer for inputs, and the farmer depends on the chef for meals. Capitalistic trade is honest and works best when both parties are mutually dependent with equivalent leverage. The more trade they do, the more dependent each party becomes on each other.
However, the dependence may not be symmetric.
The chef needs the farmer a lot more than the farmer needs the chef (unless there are multiple farmers or multiple chefs)! The chef is unlikely to be able to produce inputs without the farmer, whereas the farmer can still make a passable mean without the chef.
In many ways, unbalanced trade is the source of most disagreements in the real economy.
I believe one of the key reasons why it is easy to dislike wealthy people is because wealthy people sometimes do things that are harmful for the rest of us.
In a mutually-dependent Society interlinked through trade, we would never actively seek to harm each other because our livelihoods depend on others. Such Societies tend to seek win / win outcomes.
However, even if someone makes a lot of money through honest means, extraordinary wealth suggests Society needs this person (and their productivity) A LOT more than this person needs Society.
The extraordinary accumulation of wealth suggests Society is not able to produce much that this person needs or wants…
And as human nature will tell you, when you are highly dependent on someone and that dependence is not reciprocated, you are very likely open to abuse.
Many populist politicians suggest the way to address this is simply to take the Money away. While that would temporarily reset the score / Debt, it fundamentally does not address the underlying issue: Society is more dependent on what this highly productive person can do, and Society is unable to produce enough of what the person wants. Reseting the score helps temporarily, but it is no different from breaking the promises to these productive people…and as I’ve argued before, if you break promises prepare to get less of what that person was producing. Of course, this doesn’t mean Society shouldn’t have things like taxes (we should), but the outcomes depend on the leverage that Society has to replace productive people that choose to stop providing services when their promises are taken away vs productive people’s ability to move to a different Society that provides better promises.
This is an issue not just within Societies but between Societies, too.
For example, the US-China trade relationship is a fairly imbalanced one. The US is highly dependent on China for a great many things, while China is reliant on the US for far fewer things (but critical for future development). And this imbalance is a key driver of the tension that now rules the relationship.
A third key issue strikes at the heart of Capitalism: If someone shows up with Money, they have the ability to make you do things.
That is simply part of the bargain.
In a mutually-dependent Society, a person with Money would never ask you to harm yourself or Society because the outcome would be bad for them, too.
But as we’ve discussed above, vast accumulations of wealth suggests that there may be a class of people that are less dependent on Society than Society is dependent on them.
And the magic of Money allows them to compel Society to do things. Without much dependence on Society, it may be tempting to use Money to make Society do things that are net negative for Society but good for them.
Not only does this destroy the win / win nature that all good and honest Capitalism rests upon, it can create a Society that is corrupt and unjust.
And the byproduct of the creation of corrupt and unjust Societies is always the feeling of enslavement…being dependent on powerful (but perhaps productive) people that use their power to reinforce Society’s dependence.
One contemporary area to note is that crypto has allowed some people to print their own Money (some financial in nature with uncertain payoffs in the future, and some Religious in nature involving promises of some better world / future). And Money can be used to compel people to do things. Many smart people are now attracted to crypto. How many people are truly doing real useful Work vs being pulled in and compelled by printed Money?
Crypto is printing Money, and Money can make Society do things.
One of the central ideas underpinning economics is that prices convey information. High prices mean something is value, while low prices mean something is less valuable. Rising prices mean you should make more, and falling prices mean you should make less.
You don’t have to take my word for it, you can hear it directly from the Master of the Universe of our current era:
Although he attributes this to money instead of prices, the point is clear. Prices convey information, and Money is what gets people Working.
Except something very curious is happening in our world today. I am not sure if it is due to cultural shift or perhaps changes in institutions and economic structure, but rising prices no longer always incentivize more production.
In fact, many times the opposite is true!
Many people now look for rising price trends and then try to corner the market.
This used to be behavior that was very unique to financial markets, but now people exhibit this tendency in many real economy goods as well. Housing is an obvious one, but increasingly many people are speculating in real world goods like toilet paper during the pandemic. Right now with oil, food, mineral prices at very high and rising levels, many producers of these goods do not appear to be trying their best to produce more.
This behavior is going to get a lot more interesting, especially as the world financializes. As the world financializes more and more, we are able to finally see and trade anything. With constantly moving prices, the tendency to seek rents and corner markets may eventually break the function of price signals in a functioning real economy – rising prices should incentivize you to make more, not hoard what already exists.
Capitalism has many issues.
And Capitalism is possibly dying in the face of an ascendent era of Religion.
This new era is neither good nor bad, but different.
It is neither good nor bad that we are all “investors” (read as: speculators) instead of laborers, but different.
And will likely be more volatile with more disparity (perhaps self-evident at this point).
There were already a lot of issues, but instead of fixing it, it seems the world increasingly believes that we should accelerate it. The way the world wants to address it is not by controlling financialization but instead by financializing everything.
Including health and wellness, climate, culture.
The Greeks had Plutus, God of wealth:
The Romans had Abundantia, Goddess of abundance and fortune:
The Hindus had Lakshmi, Goddess of wealth and fortune (among other things):
The Chinese had Caishen, God of wealth:
What will be the new Gods of this coming era? Will they be the new Gods of wealth or will they be simply new Gods of whatever we care about with a ticker price attached?