Where Does the Money Go?

The mariner has pondered how real cash dollars disappear during a downturn of the economy. There is no cash to buy things that are bought easily in better times. What happened to all the dollars that were around during good times? As he read about dollars, he learned that there are many different kinds of money – which makes it difficult to ask such a simple question as “Where is the money?”

The oldest money is commodity money – trading two pigs for a horse and a wife. There are no dollars in commodity money – only the relative value of a pig versus a horse, a little clamshell for a bigger clamshell, and a variation where labor is considered a commodity – I’ll shovel your snow if you give me a turkey. This kind of money worked fine except that it is hard to carry pigs, horses and turkeys in your pocket.

It wasn’t long before the first “banker” went into business by warranting, for a fee, that you did indeed have a horse that can be exchanged for a wife and conversely, there was indeed a father trying to marry off a daughter. This was easier because people didn’t have to carry all these commodities around; just show a note to the other party that the banker has warranted that a horse is available and vice versa. Is this note a kind of dollar?

What happens to the note if the horse is not available?  Oddly, the banker’s note still exists but the horse doesn’t. The note still says you have a horse. In 2008 this note was called a derivative. So many people had derivatives that did not actually have horses that the whole process came to a standstill. Actually, the horses were supposed to be in people’s homes. They had a warranty from the mortgage company that said they had horses, but they had no horses. The bankers were shrewd. They took out insurance in case there were no horses. So the bankers made tons of money replacing nonexistent horses.

There still are commodity dollars around today. In fact, there’s something called a commodity exchange where people gamble about how much a commodity, like coffee or corn, will be worth next year. The most commonly known commodities are gold and silver except that the value of the dollars in our pockets has nothing to do with gold and silver unless you want the gold, then you need to give away some dollars. Do the dollars you give for the gold mean that you are warranted to have enough horses to match the price of the gold? Only if they are real dollars. They are real only because the Federal Government’s Central Bank warranted your horses.

Forget commodities. Dollars are not based on commodities anymore. Today there is a theory that money isn’t real. “Money” is your worth to a credit company or a bank. For example, if you bought a soft drink for a dollar with your credit card or a check, or “real money,” there was no money spent or earned. Instead, your warranty dropped in value and the seller’s warranty went up in value. Value is the new word for money. There are no real dollars; if you have paper dollars, they have no value except on a ledger sheet where you received your paycheck, your bank, or your credit card. Just like the barter days, you don’t have to carry around a lot of dollars to demonstrate warranty, you just need the bookkeeper’s credit card – the universal warranty.

The theory goes that the more value in play from buyer to seller to buyer, etc., the more value can be created – not dollars but value. Using this “circuitous” redistribution of value – or credit – value can be created without commodities (horses) as long as the circuitousness keeps moving. You add value to the circuit and the circuit creates ten times more as it redistributes your value. In downturns of the economy, the circuit slows down and does not create as much new value. If you have spent more value than you contributed, then you have to go looking for horses to pay off your debt to the circuit.

You may not have followed this account well, but the answer to the question “where does the money go?” is that it isn’t created when the circuit slows down. The money doesn’t exist in the first place.

Ancient Mariner

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