After my recent Financial Advisors are for Suckers post, I had a bit of an epiphany about using any currency as a store of value: it doesn’t do that.
And now my conversations with Carl Richards and others I’ve spoken to over the years suddenly makes so much more sense…
Rather than searching for money in some absolute form, it’s much more useful to think about the currency we use as if it’s a living thing. It’s not alive, but as a byproduct of we who are alive, it has much more in common with us than anything in the natural world.
Every currency has a life cycle after all: it is born, it grows, it matures, and it dies. This is true of every currency that has ever been, except the ones that haven’t died yet. Like any living organism, we don’t know exactly when they will die, or specifically why, but we can safely be quite sure that at some point they will. It’s not inherently good or bad, it just is. When the old things die, it makes more room for the new things to grow, and evolution goes about its merry way.
Like every other living thing, currencies go through stages and change over time. Though my own worth in terms of my life and its value to the rest of the world is tricky and a bit distasteful to calculate, it is calculable. And without even doing the math, we can intuitively see that my worth as a 1 year old, a 10 year old, a 20 year old, a 40 year old, and an 80 year old would be different. There is a mortality rate, and no guarantee that I’ll make it from 1 to 10, or from 20 to 40, or that I’ll ever make it to 80. Maybe I’ll live to 100? No one knows, but we know that the 20 years from 80 to 100 would be very different in terms of productive value than 20 to 40, or from my birth to my 20th birthday.
So it is with any currency, be it dollars or euros or renminbi or bitcoins or whatever. They are each, independent of each other, on their own life cycle. Someday they will be gone, just as no one uses francs or guilders or drachma anymore even though they were once the most valuable forms of money that there were. The overall trend for the last 500 years or so is that the “global reserve currency” spends about a century in that status (plus or minus 20 years).
Remember that we made all these things up. Money is not a concept ordained by God and handed down from on high, nor is it an evolutionary mechanism we can observe in any other species. It’s a people thing, a work of man.
Even with currencies, whether fiat or crypto or pieces of eight, they don’t actually exist. Okay, so the little piratey slices of silver do physically exist, but their value doesn’t in any absolute sense. Whether physical or digital, these are merely representations of a larger belief in some larger worth or faith in their value.
And only those who share the faith will find them valuable. I couldn’t convince a pirate in the Caribbean to take my hash on the blockchain in exchange for any of his loot. No matter how much it may represent to me, I’d be lucky to live through explaining the bargain. It’d likely be the same with rubles, what good would they be to someone half the world away and no ability to get there to exchange them for things? It wouldn’t matter how many I had, it’d make about as much sense as a Zimbabwean Trillion Dollar note.
So currency is bound by time and place, just as we are. It just happens that they are less bounded than we are. But the fact that they tend to live longer than us or get around more does not make them immortal or magical. They live, they die, life goes on.
The life that goes on is a lot of exchanging of things. We call these exchanges “markets” after their traditional roots in our exchanging of things to help life going on for many thousands of years. Regardless of what is bought or sold, and whether it is bartered for or there is a medium of exchange (money) in the middle, these markets very literally express value. As in what we do actually value, in terms of exchangeable worth, in any given moment.
And for many thousands of years, you could go to one market and sell something for one value, and then go to a different market and sell the same thing for another. The closer those markets are in terms of time and place, the more similar the values would be. The further apart they are in time and space, the less those values would look alike. Try to sell a pig at market in Chicago a hundred years ago, get one value. Try to do it today, get a pretty different one. (Pork bellies actually haven’t been traded there for a decade, but I think you get my point).
The function of the currency is as a summation of all the agreements about all the values of all the things being exchanged. Who agrees is constantly changing, what they’re agreeing about value is constantly changing, and thus the value of the currency itself is constantly changing. It’s supposed to, there’s nothing wrong with it. It was never meant to “store” anything, when we made it up we didn’t make it for this purpose. Currency is to express current value.
Then there’s the geopolitical element of state-sponsored and central bank managed fiat currencies. That throws a new level of manipulation/complexity into the mix, but it doesn’t change the fundamentals of what a currency is.
Or we can take the governments out of it and talk cryptocurrencies. Again, new levels of manipulation/complexity to discuss, and again it doesn’t change the fundamentals. You can put it in cold storage, sure, but it’s only existed for a dozen years or less, so who can say what will happen to it a dozen years from now? Who can say for any currency for that matter? And just how similar in lifespan is a crypto compared to a fiat? We don’t really know. We just know that they both will die at some point.
Because that’s how it always works. That’s how we made it to work when we humans made it all up.
The fact that you and I weren’t consulted when it was all getting made up or that currencies tend to live longer than we do doesn’t seem fair, I agree. But here were are. If you want to make up something better, I’d love to hear about it! :)
Back to the store of value idea. We can project based on trends what something will be worth at some future time, but we can never know. Not with what we have right now. We’re just guessing as best we can.
Some people can guess well, granted. They can take lots of snapshots of valuation across lots of currencies and infer purchasing power over time for goods and services as things enter and exit the financial world as resources and waste, input and output. The closer in time and location the predictions are to the here and now of the person making the guess, the better their models about currency agreements (aka valuations) will tend to work.
Yes, they can plot all this info over time, beyond our lifetimes, and estimate what a cheeseburger is worth in a hundred years’ time. But there is no guarantee that we will be eating either cheese or burgers in a hundred years. Given the trajectory of our environmental stability from everything that we can see from here, resource rich and animal-based protein may not be so tasty then. Or it might be the most valuable thing in the world because of its scarcity. Place your bets as you please.
Storing any amount of any currency today for a cheeseburger beyond next Tuesday is just a guess. For whatever the 2121 A.D. or the 2121 B.C. equivalent of a cheeseburger may be, no currency in 2021 would probably be able to buy it anyhow. Who would want to take that silly money? If no one shares our belief in a currency as valuable, is it? Not as medium of exchange it isn’t.
And that’s fine. So I’ll stop trying now. I’m a vegetarian anyways, and I’m not having any kids, so it’s really not my game.
I’m finally psychologically prepared to use currency differently. How about you? Comments are valued here!