Money is Bookkeeping; Goods are Real
Despite the obsession with money in American culture, Americans do not know what money is. Money is simply the bookkeeping of debts of goods and services owed. Who consumes goods and services is what matters, not who gets money.
To understand how society will function when robots do most work requires understanding what money is. This post is a prelude to future posts on how our economy will have to change as robots, and automation generally, continue to rise in effectiveness, turning all of us into horses.
The valuelessness of money, and the importance of goods and services, is an area of finance the poor understand better than the rich.
If you ask a low-income person to describe what makes a person rich, they will talk about a large house, fancy cars, expensive clothing and jewelry, a housekeeper and cook, a big boat, an airplane, fancy vacations, hookers and blow, etc. These are all goods and services a rich person can consume.
If you ask a wealthy person to describe what makes a person rich, they will talk about stocks and bonds, net worth, income producing properties, royalties and residuals, how many zeros in the bank account balances, etc. These are all just bookkeeping of who owes money, the promise of future consumption, to the rich person.
My description of money as bookkeeping of debts is not new. All fiat (paper) money, money with no intrinsic worth, is based on someone being willing to exchange a good or service for a piece of paper that represents a debt.
Originally, individual banks issued these notes and promised to, e.g., give a pound of silver on demand for the note. This is why a “pound sterling” is the unit of currency in England. Of course, silver and gold do not have much value either, effectively almost fiat money, but they seemed a bit more real for the financially naïve people of the time.
A great way to understand how fiat money has no value is to imagine what you would want to have after a nuclear war: 100 pounds of wheat, a pound of gold, or $100,000 in cash? IOUs have no value if no one has any goods or services to pay off the IOU. Cash and gold are just widely accepted IOUs.
To understand the economy, we need to understand who is winning or losing in the economy based on goods and services, not money. Of the goods and services people consume, the goods and services that matter are personal consumables.
Consider someone who owns an apartment building s/he does not live in. While the building is a physical good, all the owner derives from it is the income stream, rent minus expenses. For the owner, owning the apartment is an investment, an IOU with a bookkeeping value, not a consumable good.
For the people who live in the apartment building, the apartments are some of the goods and services they consume, the stuff that makes their life better.
Notice how ownership does not track who benefits from the apartment building. The people who get a roof over their heads “own” nothing more than possibly a lease, which just obligates them pay each month. The owner still must find a place to live.
This is an important point: ownership is just more tracking of debts owed. Like money, it is just bookkeeping, a promise of possible future consumption of goods and services. Ownership is not the same as consumption.
Ownership and consumption can go together. I both own my house and consume it by living in it. The ownership is the legal (bookkeeping) basis for why I get to stay in my house. I can call the cops — another service — to evict anyone who tries to live in my house without my permission.
Focusing on consumable goods and services explains Social Security retirement and Medicare better than the usual tracking of taxes and monthly payments.
Each year, seniors who produce nothing of paid value, no goods or services anyone wants to buy, get to consume houses or apartments, food, cars, a lot of medical care, and many more goods and services that others produce.
Seniors can consume these goods and services because the typical worker agrees to consume about 15.3% (payroll taxes) less than the workers produce for their employer. Taxes are just the way to bookkeep that agreed reduction in consumption.
In exchange for reducing consumption by 15.3%, the worker gets another IOU — this one is their Social Security Retirement credits, which say they will be able to consume goods and services when they are old, even though they no longer will be producing.
What is odd about the Social Security promise is that the people who are getting today’s workers’ production, today’s seniors, will be dead when the people working now need the promised goods and services. The dead people obviously will not be producing those promised goods and services.
Social Security is a promise, an IOU, across generations. Today’s workers’ children will provide the goods today’s workers will live on when they are old. Today’s children will do this by giving up some of what they produce in the future.
This brings us to a final revelation from viewing the flow of goods and services, not money. Basically, all goods and services produced this year are consumed this year by someone. There is no “saving” of goods and services for the future.
Most of the goods and services people want do not last long. Medical care, food, transportation, and housing all need to be consumed within a few years of production, otherwise they “spoil.” None can be saved for, e.g., 50 years, to be consumed when old.
There are “durable” goods that could be put in a warehouse and saved for later consumption. However, this (inventory growth) is a minor part of the economy. Even durable goods have important characteristics that are consumed right from the beginning.
If I build a car this year, it is true it will last 10 years or more, providing 10+ years of transportation fun to someone. However, only one person will ever be able to enjoy the car as a “new” car, the first year it is on the road, which usually happens the same year it is produced.
Tracking the economy is about tracking the consumer goods and services produced this year and who consumes them. With minor corrections for durable goods, this will tell us how the economy really works.
As a last thought exercise, now that we understand consumption is what matters, who is the richest, Bill Gates, Donald Trump, or Taylor Swift?
By a rich person’s accounting, which is all about how many IOUs one holds, Gates is clearly richest, with a net worth of $83 billion. Trump is second, with a net worth of $3.7 billion, and Swift last, with a net worth of ~$250 million. Bill Gates is 20X richer than Trump, and Trump 15X than Swift.
However, by goods and services consumed accounting, Bill Gates is likely the poorest.
For example, Gates only has one private jet, a Bombardier BD-700 Global Express, worth about $18 million used. Trump has the largest jet, a Boeing 757, but Trump’s planes are old, so the total value of his two planes is $21 million. Swift’s pair of Dassault Falcon tri-jets are the most valuable, at $30 and $6 million used.
By following consumed goods and services, in this case airplanes, Taylor Swift is richer than Donald Trump, and Donald Trump is richer than Bill Gates.
Modifying the title slightly into an Alphorism, “Money is bookkeeping; consumption is real.”
Copyright © 2016 by Al Lee. All rights reserved.
